As the new week starts the DAX index and Dow Jones traders’ mood remains upbeat, as the growth rate of new coronavirus cases dropped further over the weekend, and the world is getting ready to open for business. The China PMI on Thursday will give us an idea of what lies ahead in western countries, while the ECB could boost risk-sentiment further if they announce that they will buy junk bonds at their Thursday Rate meeting. The Federal Reserve is also hosting a rate meeting, but the expectations are low. The ISM report, and US Q1 GDP report will also be published, but the reports are bound to be soft, as the US is still under lockdown. On Thursday the focus will also shift to Crude oil prices, as the weekly EIA report is published.
Covid-19 Growth Rate Drops
The increase of new coronavirus cases has dropped sharply over the last few weeks, and the focus of the stock markets remains on the reopening of the world economy.
On Saturday, Italy registered a daily Covid-19 increase of 1.2%, while in France, UK, USA, Spain, and Germany, the daily growth rate was 1%, 3%, 3.8%. 1.8% and 1% respectively. The very low growth rate is due to the lockdowns, and markets have moved higher since they were introduced.
US and Eurozone PMI Drop to Record Low Levels
Over the same period, the world economy has taken a beating, and last week the Eurozone Composite PMI dropped to 13.5 from 29.7, while the US Composite declined to 27.4 from 40.9.
Last week’s Jobless claims also showed that about 26 million American had lost their jobs because of the coronavirus crisis.
Despite the very soft economic data the Dow, Nasdaq 100, and the DAX 30 have traded sideways over the last few weeks, and that is because investors are looking beyond the economic weakness, which is induced by the virus and the lockdowns.
The virus is losing its grip of the economy, and the lockdowns are coming to an end, so I think it is right that the stock markets are trading where they are.
On the lockdowns easing, we could see a sharp reducing in the number of unemployed people. However, I think it is likely that some jobs will never return, and that is why I believe the Nasdaq 100, and Dow Jones are neither overbought nor oversold. The problem now is to figure out what will happen next.
My view is that we will go towards a gradual opening of the world economy and that investors will remain upbeat for now. I also think that a second wave of the virus will be controlled; however, what will happen in winter is anyone’s guess. Still, most likely, the world health care system would have built up a capacity to meet the problems, and there might even be some sort of remedy against the virus by then.
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China Manufacturing PMI
As I think we will follow a path similar to the one of China, this week’s China PMIs on Thursday night will be interesting. The China Manufacturing PMI reached 50 in January, just to dip to 35.7 in February, and then rose to 52 in March. For April, economists are anticipating the PMI declined to 51.
Many mistrust the Chinese PMI data, but other indicators, such as Chinese power plant coal consumption, Chinese traffic congestion data, and real estate floor space sales, have rebounded. However, container freight remains low for this time of the year, and I suspect this has to due with Europe and US being shut down.
US GDP, Jobless Claims, and ISM on Deck
US 1Q GDP will be out on Wednesday, followed by Jobless Claims on Thursday, and the US ISM report on Friday. I anticipate all of these indicators to show that the US economy is doing poorly, as the lockdowns are hurting. However, most investors have been ignoring the data, as they are driven by the lockdowns, so focusing on economic indicators in 2020, is like driving a car concentrating only on the rear-view mirror.
The problem is that there is a point when the risk-appetite could vanish if the data is too weak, but for now, that threshold is high.
FTSE 100 and CAC 40 Look Ready for the Next Bull Leg
From a technical point of view, the DAX 30 will remain in an uptrend above the April 7 low of 10088, while the Dow Jones will remain bullish above the April 7 low of 22339.
European stock indices, such as the FTSE 100, and CAC 40 have been building bullish patterns over the last few weeks that could trigger this week.
ECB and Fed Rate Meetings
The Fed rate meeting will take place on Wednesday, and the market expectations are low, as the Fed cut rates near to zero per cent, introduced an unlimited QE to infinity for US government treasuries and agency mortgage-backed securities. The Fed also introduced Dollar swap deals with other central banks, and then even did more. The number of programs is many, and the next step might be to help states and cities. However, for now, economists are not anticipating any changes at the FOMC meeting on Wednesday.
ECB Could Buy Junk Bonds
The ECB rate meeting will take place on Thursday, and the expectations are for the bank to start to buy risker debt under their 750 billion Euro PEPP programme. Some even think that they might also increase the program size by summer. However, the ECB has only used 10% of the funds so far, and if the coronavirus pressure eases then additional funding by summer might not be necessary. A move to buy junk bonds could boost stock markets further.
Crude oil prices and the EIA Report
Another critical report to watch this week is the EIA crude oil report on Wednesday afternoon, as investors will be interested to know how crude oil inventories changed in last week’s dramatic week for crude oil prices. The June future was trading at $16.49 at the time of writing, while the August contract was trading at $23.62. The January 2021 contract was trading at $29.15.
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