Monday, May 4, 2020

Week ahead: Will the stock market rally continue amid the recession?

NBHM Research Team

Global stocks rose last week as investors focused on the opening up of economies, mixed corporate earnings, and the possibility of a coronavirus cure. A number of countries in Europe and the Asia-Pacific region have started easing restrictions as the coronavirus curve starts to flatten. Similarly, in the United States, several states have started to gradually open up. On another positive note, the FDA allowed Remdesivir to be used as a coronavirus treatment. Meanwhile, we received mixed earnings from companies like Microsoft, Google, Facebook, and McDonald’s.

More big news came in last week from the Bank of Japan, the Federal Reserve, and the European Central Bank. The three banks left rates unchanged and pledged to continue supporting the economies during the weakness. We also received disappointing first-quarter GDP data from the United States and disappointing manufacturing and services PMI from a number of countries including Australia, Japan, and China.

S&P500: The S&P500 and the Dow Jones rose by more than 12% in April as the market reacted to signs of reopening, positive monetary policy framework, hopes of a drug to treat coronavirus, and mixed corporate earnings. This week, the focus will remain on corporate earnings as a number of big companies in the index will release their results. Some of the top companies to watch will be Avis, Chegg, Ferrari, Parsley Energy, Realty Income, Skyworks, and Tyson Foods, among others. The index is also likely to react to economic data like the nonfarm payrolls and jobless claims.

US dollar: The US dollar index declined slightly last week as other countries started to open up. The idea behind the weakness is that demand for local currencies like the Swedish krona and sterling will rise as business activity starts to rebound. The dovishness of the Federal Reserve also contributed to this weakness.

The biggest dollar-related data expected next week is the nonfarm payrolls, which will be released on Friday. Analysts polled by Bloomberg expect the data to show that more than 20 million people lost their jobs in April. They also expect the unemployment rate to soar to an unprecedented 14%. They also predict the average hours to decline from the previous 34.2 to 33.9 and wages to decline to 0.2%. Another important data release will be the final manufacturing and services PMI data from Markit.

Euro: The euro soared against the US dollar last week mostly because many European countries have started easing their lockdown. It also rose after the ECB decision released last week. In the statement, Christine Lagarde said that the bank was willing to do “whatever it takes” to support the region. The biggest challenge is that EU members are yet to agree on a financing package to help countries in the recovery phase. Such a deal would be positive for the euro because it would remove – for the time being – the talk of another financial crisis in the region.

In the coming week, we will receive a number of important economic data from the region. These include the final manufacturing and service PMI from Markit, industrial production from Germany and France, and trade numbers.

Australian dollar: The Aussie was one of the best-performing currencies in the developed world in March. The currency rose by more than 6% against the US dollar as the market reacted to the improving situation in the country and China. The rally ran out of steam on Wednesday when AIG and Markit released preliminary PMI data. This week, attention will shift to the Reserve Bank of Australia (RBA), which will release its monetary policy statement. With interest rates already at record lows, analysts expect the bank to leave rates unchanged. Also, the bank might comment on quantitative easing and whether it plans to taper asset purchases. We will also receive new home sales data, retail sales, and trade numbers. The chart below shows how the upward momentum on AUD/USD lost its steam last week.

Crude oil: The price of crude oil has been relatively volatile in the past few weeks. Last week, the price declined in the first three days and later bounced back as investors reacted to some positive signs. First, Norway, the biggest oil producer in Europe after Russia, said that it would slash production for the first time since the second world war.

Second, Reuters reported that Chesapeake Energy was considering filing for bankruptcy. It will be the second major shale producer to go out of business after Diamondback. While this is bad news for the company, it is positive for crude oil because it means that supply will be curtailed. Third, data from EIA showed that oil inventories rose at a slower rate than before. This week, we will see whether the downward trend will continue.

British pound: The British pound rose sharply against the USD last week mostly because of overall US dollar weakness. The sterling also reacted to the return of Boris Johnson to Downing Street as he picks up the leadership reins again. This week, we will receive the manufacturing and services PMI data from Markit. Analysts expect the data to show that services PMI rose to 34.8 from the previous preliminary 12.3. We will also receive the April house price index data from Halifax and the consumer confidence data. Still, the most important will be the rates decision by the Bank of England, which will happen on May 7. The chart below shows that the GBP/USD pair tested a key resistance level last week.

Recent Articles