The rising anxiety that the second wave of Covid-19 is about to hit the global economy is weighing on the market mood at the start of the week. Surging cases from China to US are increasingly worrying investors that another economic shutdown could be around the corner for everyone, after Beijing closed the city’s largest fruit and vegetable supply center.
Fear of another global shutdown will likely push risk investors to the sidelines this week.
Meanwhile, the recovery in Chinese industrial production fell short of analyst expectations in May, as retail sales and fixed asset investment declined more than expected. The People’s Bank of China (PBoC) maintained the MLF rate unchanged for the second straight month. Equities in China traded flat on soft economic news and no further monetary support for the moment.
Elsewhere in Asia, most markets fell. Stocks in Australia lost 1.17%, the Hang Seng (-0.62%) and the Nikkei (-1.36%) edged lower.
European and US stock indices will likely give back Friday’s gains at the open, as well. Faster normalization in Europe may not gather investors’ appreciation in European businesses, which should start feeling the pinch of rising cases elsewhere, besides the mounting risk of seeing a similar pattern at home sooner rather than later.
The FTSE is expected to pull out the 6000p support and the S&P500 should open and consolidate below the 3000 mark, as bank and energy stocks will likely come under an accrued selling pressure. Capital should flow into technology stocks and safe haven assets as investors increase hedges against a deeper global equity sell-off.
Speaking of safe haven, gold is still fighting back the solid $1750 per oz resistance. Mounting risk aversion and decline in US yields should continue giving a support to the yellow metal above the $1700 mark. A break above $1750 should trigger a decent rally on stops and encourage a quick rise to the $1780/1800 area.
In the FX, stronger demand in US treasuries and the dollar should lead to a decent profit taking in most majors which have surfed the weaker USD wave over the past weeks.
Having pulled out the minor 23.6% Fibonacci retracement on April – June rise, the EURUSD could extend weakness to 1.1160, the major 38.2% retracement, which should distinguish between the actual positive trend and a medium-term bearish reversal.
The stronger US dollar will likely throw Cable below the 100-day moving average (1.2455). Meanwhile, the latest CFTC data suggest that the net short speculative positions in sterling continue rising as a sign of a stronger selling pressure in the foreseeable future. Looking at the historical data, the market could easily absorb a further increase in sterling short positions as a result of increased no-deal Brexit bets. On Thursday, the Bank of England (BoE) is expected to leave rates unchanged but step up its asset purchases by 150 billion pounds.
WTI crude plunged 4% on Monday to $35 per barrel. The sales could accelerate as the prospects of a global recovery in oil demand are being dashed by worries of a second wave contagion. If this is the case, an extended period of travel restrictions and slower industrial activity could send the price of barrel down to $20 level.
