LCG: Shares recovery on shaky ground. 1.30 a magnet for Sterling

February 5, 2020

The sentiment recovery seen in the first days of the week appears to be losing some steam. A second influx of Chinese central bank liquidity is keeping the wheels turning in financial markets, but  cannot stop the real-life effect of a spreading coronavirus.  The death toll from the virus is close to 500 and four cases in Singapore were transferred human-to-human.

Yesterday US President Trump gave his fourth US State of the Union address to congress. It was marred somewhat by a missed handshake and a torn-up printout. Political discord in the United States has not had much bearing on financial markets. But a pause would make sense until we get the official results of the senate impeachment trial.

EQUITIES

Shares in Asia rose on the hopes of fresh Chinese stimulus, but gains were capped by data showing Chinese service sector activity hit a three-month low in January. Given the supply chain disruption caused by the coronavirus, we’d expect more Chinese data heading south to weigh on equities.

European markets have opened lower and futures point to a weaker start on Wall Street. The World Health Organisation may not be calling it a pandemic, but doubts are creeping back in about the coronavirus derailing an economic recovery.

FOREX

Currency markets are flat ahead of a final reading on the UK services PMI and Eurozone retail sales this morning and the US ADP unemployment and ISM non-manufacturing PMI out later.

The 1.30 level is still acting like a magnet for the British pound pulling it back up when there are Brexit fears and back down when there is better-than-forecast economic data for the UK. Construction has been especially sensitive to Brexit uncertainty so the pickup in activity reported by purchasing managers was well-received.

A series of improving economic stats from the United States has seen demand for the dollar pickup. It started with the manufacturing sector ending its contraction and could improve still if services data out today seems its expansion extended.

COMMODITIES

Oil prices are slightly firmer on Wednesday having reversed daily gains and turned lower on Tuesday. It is still not clear whether an emergency meeting will be called on February 14 and 15th, let alone whether action will be taken by OPEC. We’re not certain there is enough willing among member states to participate in more production cuts and cede more market share to the United States.

Gold is seeing a modest recovery after having found support at the $1550 per oz level following a two-day bashing that saw its value per oz. drop $40. Gold had been holing its own despite the recovery in risk sentiment but a surge in the dollar could be its undoing. Friday’s NFP report might determine whether we’ve put in a short-term top in gold.

Opening Calls

S&P 500 is set to open 3 points lower at 3294