Swissquote Bank: Sentiment boosted by Gilead and Q1 tech results

April 30, 2020

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

US and global equities are boosted by positive news from Gilead’s remdesivir trials to treat Covid-19 and solid results from Microsoft and Facebook as expected. In fact, stay-home environment benefited to Microsoft’s Team, where the daily active users rose by 75 million. Not quite bad, when we take into account that the latest US surveys hint that many employers consider offering permanent remote-working jobs in the close future, and the coronavirus experience will certainly lead to a new way of doing business. Bingo.

Facebook on the other hand revealed strong results, but voiced concerns about weakening advertisement revenues, as consumer cyclical businesses, led by travel and leisure, cut back on their marketing spending in March.

The Dow and S&P500 closed 2.21% and 2.66% higher respectively, as Nasdaq led gains with 3.57% advance on Wednesday.

The rally continued in Asia. The ASX 200 gained 2.65%, Nikkei jumped 2.84%, as Shanghai’s Composite (+1.30%) and CSI 300 (+1.22%) followed with softer advance as the Chinese manufacturing unexpectedly slipped to 49.5 in April, pointing at a surprise contraction in activity as exports shrank sharply, employment remained weak and deflationary pressures were strong amid the coronavirus spread to the rest of the world.

Speaking of dwindling world economy, the US economy shrank 4.8% in the first quarter. This was the first economic contraction since 2014 and the steepest slide since 2008. As such, the US record expansion ran into a brick wall. The number wasn’t a shocker of course, as most businesses stopped their operations to combat the coronavirus contagion and spending tumbled, yet the outlook became clearer: the second quarter slide will likely be a large double-digit drop that could go up to 30% as suggested by leading bank forecasts.

Due today, the European GDP is expected to be more severely impacted than the US figure in the first quarter, given that the coronavirus outbreak and the following economic shutdowns wreaked havoc in the European economies a couple of weeks before things started getting bad in the US.

At its monetary policy meeting today, the European Central Bank (ECB) is expected to maintain the interest rates unchanged, as the ECB’s Q1 Bank Lending Survey showed that companies’ demand for short-term loans rose in the first quarter due to emergency cash needs in the context of the pandemic-hit activities, and the rise is expected to be sharper in the second quarter.  

But the ECB could consider expanding its pandemic QE program by up to $500 billion euro in the absence of a suitable outcome from the fiscal policy leg. There are also rumours that the ECB could start buying junk bonds to give a further financial support to businesses which have been struggling with the serious implications of the coronavirus-led economic shutdown. While the dovish ECB expectations are expected to weigh on the single currency in the run up to the meeting, an announcement of further monetary easing should not necessarily hurt the euro, as a potential ECB commitment to purchase higher risk – higher return instruments should also boost investor appetite in these higher-risk euro-denominated assets, encourage increased inflows towards the single currency and lead to a certain euro appreciation.

The US dollar remained soft on the back of a joyous market sentiment and some end-of-month USD liquidation.

Gold remains bid near the $1700 per oz, and WTI crude tests the $18 mark on the back of lower-than-expected US inventories build of 9 million barrels last week. However, the fundamentals in the oil market works against a sustainable recovery at the moment, therefore price advances could be interesting top-selling opportunities for oil bears.

The EURUSD is offered into 1.0880. The ECB meeting could move the pair outside of its 1.08/1.09 range today. A move above the 1.09 mark should hint at a firm recovery toward the 1.10/1.1020 mark, where lies the 200-day moving average.

Cable is still hesitant near the 1.25 mark. In the dearth of UK specific news, the pound remains silent this week. A softer US dollar could encourage a move above the 1.25 mark. The main risk to the pound’s positive vibe is a reminder from Downing Street that the UK will leave the EU by the end of this year, no matter what. However, we may not hear much from Boris Johnson this week, who will likely remain busy with his new baby boy born yesterday.