Swissquote Bank: Equities down on dire economic data

1 mei 2020

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Donald Trump’s USA continues devoting all necessary monetary and fiscal measures to help the economy fight the coronavirus-led economic slowdown. The Federal Reserve (Fed) announced to expand its Main Street Lending Program yesterday so that more small and medium sized businesses could access affordable credit. Meanwhile House Speaker Nancy Pelosi announced that the next fiscal aid package could be near $1 trillion.

Major US indices closed their best month in three decades on a negative note, although the announcement of more monetary and fiscal stimuli helped reversing a part of the earlier decline. Nasdaq recorded timid losses only, before Amazon and Apple reported earnings.

As widely expected, both Amazon and Apple benefited from the coronavirus lockdown. Apple’s revenue surprised to the upside despite 7% fall in iPhone sales. Its revenue from services rose by 17%, higher than analyst expectations. Meanwhile, Amazon sales soared as locked-in consumers rushed to online stores creating a weeks-long Black Friday environment, which sure caused significant delays in deliveries, but Amazon made the equivalent of $33 million per hour.

Both Apple and Amazon shares fell in the after-hours trading, as investors considered having hit their targets following a six-week rally. The US futures fell. As we have mentioned in our earlier reports, the US tech giants have been skewing the S&P500 to the upside. Souring mood in these stocks could renew the selling pressure across the US stocks, where most companies have not been as lucky as FAANG to shine during our century’s worst economic slowdown.

Alas, the economic data brings investors back on earth. Things are not as rosy as suggest the FAANG first quarter results. In contrary.

The personal spending in the US tumbled 7.5% in March, the highest decline on record, as households’ income fell 2%, the most in more than 7 years. Staying home has clearly hammered American businesses; there is no doubt that these figures will get well uglier before they start looking better. The jobless claims rose by another 3.8 million last week, more than 3.5 million penciled in by analysts. Over the past six weeks, the US jobless claims jumped by more than 30 million, a terrible number. Although we have started seeing a declining pattern in new claims, millions of Americans will continue filing for jobless benefits as a result of a complete shutdown in most economic activities across the country.

The US dollar came under a strong selling pressure on the back of dire economic data and further easing from the Fed. The US 10-year yield was little changed near 0.62%.

Elsewhere, the European Central Bank (ECB) maintained its key interest rates unchanged at Thursday’s meeting, but pulled the interest rate on TLTRO III operations down by 50 basis points and announced that it could expand its Pandemic Emergency Purchase Program (PEPP) if needed. The latest data suggested that at the current pace of buying, the program should reach its limits by October this year. Hence, we could expect an announcement of up to 500-billion-euro expansion this summer.

The EURUSD saw support near the 1.0830 mark, as investors were pleased with the ECB’s commitment to boost the economy, which it expects to shrink between 5% to 12% this year. The ECB is again filling the gaps that the fiscal policies leave open.

The euro is stronger on prospects that the ECB aid would temper the coronavirus-induced economic shock. But what really boosted the EURUSD was the sharp sell-off in the US dollar. The EURUSD rallied to 1.0972. Next week could see an enhanced battle between the bulls and the bears near the 1.10 mark.

Today Europe is closed due to bank holiday. Investors will be watching the final manufacturing PMI figures in the UK, US and Canada, which could hardly better the investor appetite before the weekly closing bell.

Most Asian stocks didn’t trade today. Where the trading was on, the bears were clearly in charge of the market. The Nikkei fell 2.65% and the ASX 200 tumbled 3.80% as Australian AIG manufacturing index dipped from 53.7 to 35.8 and the Korean exports plunged 25% in April.

FTSE futures (-1.41%) are poised for a bearish start in London.

Gold tests the $1680 per oz to the downside, while WTI is forcing the $20 a barrel resistance.