16:45 Pound rallies as Europe sees stability creeping in
Sterling stabilised after its nasty little fall yesterday, rallying off its lows at 1.14750 struck overnight as risk appetite seemed to return a bit today. GBPUSD recovered the 1.17 handle before it ran out of steam on the 50-hour moving average at 1.18, seeing it pull back to 1.1660. Efforts by the Federal Reserve to establish swap lines with a number of other central banks seems to have helped. The swap lines ought to ease the global dollar funding squeeze. We also probably saw speculative bounce on oversold conditions.
However, it’s not the case outside of GBP. EURUSD has failed to rally and is threatening to break down at 1.07 support. USDJPY has also rallied north of 110. The funding squeeze and scramble for dollars remains a strong force in the market. I think in many ways GBP has risen because it’s been a more risk-on day – AUD and NZD also performing well, posting decent gains vs the greenback, so the riskier currencies are in the ascendancy today.
The Bank of England’s decision to cut rates to 0.1 per cent and expand its QE programme by £200bn didn’t have much impact at all. The Bank is now all-in. You might as well be hanged for a sheep as a lamb.
European equities have been much better today, with signs of real stability creeping back in and a close at or very close to the highs of the day. We saw a pop on the open, the usual selling into the rally but then crucially the troops staged a rally later on to finish up 2-3 per cent. The FTSE 100 has recovered 5100 and broken out north of near-term channel resistance to 5180 and notch a 2 per cent gain. Near-term the upside looks capped at 5200, but this is a rally I like – I like this much more than a 10 per cent rebound. It’s starting to show glimpses of more stability. We seem to know now that the central banks – even the ECB- are ready to do whatever it takes. We know governments have woken up and will throw as much money at this as they can. Investors are starting to think they don’t want to miss out on what could amount to being the greatest buying opportunity for a years.
US equities were trading around the flatline by the European close. FAANGS are leading the way – quality like this is hard to find this cheap. How do you think Apple will perform a year from now? I don’t think it will be that bad.
Oil has also enjoyed a substantial dead cat bounce, a dead tiger bounce if you will. WTI surged through to $25 in response to yesterday’s 24 per cent fall. At 17 per cent it could be heading for its best day ever. Conditions for crude markets still look incredibly bearish.
08:00 Glimpses of stability for European equities, GBP still weak
The European Central Bank (ECB) loves inelegant acronyms. To LTROs and TLTROs we can now add PEPP - the Pandemic Emergency Purchase Programme. As cumbersome as it sounds, the €750bn fund looks more like a bazooka than anything they've done thus far. Christine Lagarde and co knew they had to step it up and have. The asset purchase programme will loosen existing rules to cover non-financial commercial paper. The spread between Italian and German bond yields came back in to 188bps, after blowing out to 320bps. Italian yields have tumbled and across Europe sovereign bonds yields are lower. Ms Lagarde, I feel, realises it is indeed her job to prevent spreads widening and it seems she has finally got the message through to the market that the ECB is going to do 'whatever it takes'.
Elsewhere we see stimulus efforts stepped up. White House economic adviser Larry Kudlow has talked up the prospect of the federal government buying equities as the US senate passed its second coronavirus bill, at the same time as they rush to approve a third that will be worth $1.3tn. Relief is coming thick and fast: The Reserve Bank of Australia cut rates 25bps and starts QE; Japan eyes $276bn package of support; South Korea launches new package worth $40bn; and Brazil cuts rates 50bps to 3.75 per cent.
Yesterday, the Dow and S&P 500 finished 5-6 per cent lower, and trading was halted for 15 minutes at one stage as the 7 per cent circuit breaker was triggered. Asian shares followed lower overnight.
European equities are broadly higher after the ECB fired its bazooka, with the CAC in Paris leading the way with a 3 per cent rally half an hour into trading. Volatility remains however, and rallies are yet here to be sold. I prefer to look for stability over a few days than latch onto a single-day rally.
The FTSE 100 held the 5,000 level yesterday and the 4900 low was not even tested, which offers a flicker of hope. If you have a list of things you're looking for to decide whether the bottom is in, then that would be a tiny tick in the column. This morning the FTSE opened up a touch higher to reclaim the 5100 level. I'm not sure these stimulus efforts are enough yet to help the market fully bounce, but we are looking for signs of stabilisation with smaller daily moves in the main indices, and for certain sectors to start to respond better. Telcos in Europe rose 2 per cent in early trade, while Oil & Gas was up 1 per cent as crude prices ripped higher after yesterday's collapse.
In FX, the pound suffered one of its worst days in a long while and crashed to its weakest level against the US dollar since 1985. This is largely about a dollar funding squeeze, which central banks are desperately trying to fix to little avail at present. If you look at the worst performing currencies over the last few days they are the NOK, AUD, GBP and NZD, which funnily enough are the most risk-on currencies in the world. Sterling has become a risk-on, risk-off play - RoRo in the trade. As HSBC analysts stressed yesterday in a note, Global Britain means a Global GBP, which makes it way more exposed to risk sentiment moves than it was in the past.
This morning, GBPUSD still looks very shaky and struggled around 1.15 still in early trade. Need to put a bottom in this before we can start to talk about levels - the move has taken out the last vestiges of support and now the road is open. Overnight the pair put in a series of lows at 1.14750 and this has held and set up a push back to 1.16 in early trade before a quick retreat to 1.15 was made. Need to take out 1.16 and recover yesterday's substantial support-turned-resistance at 1.1650.
US crude prices endured their 3rd worst day ever yesterday - WTI sank 24 per cent to take a $20 handle. Today prices are rebounding auto $23, helping lift some of the majors, but the picture still looks incredibly bleak for crude prices.
Ex-dividend factors clip 1.6 points from the FTSE 100, 22.3 from the FTSE 250
Neil Wilson is chief markets analyst at Markets.com
