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Market Outlook: European finance ministers disappoint so far

The rally runs out of steam
April 8, 2020

What goes up must come down. European stock markets were trading weaker in the early part of the session after the US rolled over yesterday and we had a weak handover from Asia. The FTSE 100 shed 70 points, or 1.25 per cent, in early trade. Wall Street suffered a sharp pullback yesterday with the Dow finishing down 26 points having at one stage being up 900 points.

Sentiment was strong at the start of the week, but markets are now moving around on daily death and infection rates, which are of course lumpy. Italy seems to be heading in the right direction but Spain’s death rate rose on Tuesday. France’s death rate has exceeded 10,000. New York’s numbers still look dreadful, with Governor Cuomo announcing the state’s highest daily fatality rate so far. 

The meeting of Eurozone finance ministers broke up Wednesday with no agreement on any additional joint stimulus. Eurogroup President Mario Centeno tweeted that ministers were “close to a deal but not there yet”. Talks continue today. Whilst the ECB’s big bazooka helped to steady the ship and calm markets, the real task is working out how nation states will come together to pay for the stimulus and recovery. 

Disappointment around the meeting sent Italian benchmark yields higher, widening the spread with German bunds. Italy’s 10-year BTPs rose to 1.8 per cent in early trade, opening up 210bps with German 10-year equivalents. The worry is if the Eurozone cannot agree what to do about this, individual countries like Italy will be left taking things into their own hands, very likely increasing borrowing costs for southern European nations like Spain and Italy. Southern Europe want a joint fund – coronabonds – to tackle the cost of this crisis. The Germans and Dutch are, unsurprisingly, not so keen. European solidarity and all that. This goes to the core of the European project – if they cannot club together now, rich and poor, to sort it out, then what is the point of all the rules the rest of the time?

The euro spiked lower on the widening in spreads. EURUSD traced a straight line down to 1.0830 but has pared losses a little and bear in mind the cross is still some way above the week’s lows around 1.0780. Elsewhere in FX, AUDUSD picked up on the RBA’s decision not to cut again and rallied through to the 0.62 level before retreating.

Looking to oil again and we are receiving the same kind of chatter around the planned OPEC+ meeting tomorrow. Sources are talking about anything from 0 to 10m bpd being on the table. UAE’s energy minister says he is confident the cartel and its allies will reach a substantial deal this week. We shall see whether it’s enough. WTI was higher in early trade but at $28.30 still reflecting hope rather than expectation. US API inventories climbed almost 12m barrels in the week to April 3rd, with the benchmark Energy Information Administration likely to show a build of around 9m barrels later today. Storage is filling up but US output is about to fall off a cliff.

Looking ahead to later today, the focus will be on the minutes from the Federal Reserve’s emergency rate cut meeting in March. This could offer a little more clarity around the thinking of policymakers at the time and therefore some idea of how long rates will likely stay this low and perhaps a notion about the conditions for an exit for this war-footing. Event have progressed so quickly though markets may well discount these minutes completely.

E-minis looking to hold onto the 38.2 per cent retracement, now acting as support after the breakout and then reversal yesterday. 4-hr MACD pointing to near-term bearishness.

 

 

Equities

The dividend dichotomy: Tesco has pushed ahead with its £5bn dividend, whilst this morning a trio of insurers have withdrawn 2019 pay-outs. RSA, Aviva and Direct Line all said they remain in a strong capital position and that it’s just the prudent thing to do.  There is clearly a lot of pressure – financial and political – on boards to scrap dividends in light of the coronavirus outbreak. Shareholders are pretty well at the back of the queue in this crisis, but savers will be relieved to see that some of the blue chips can keep up payments.

Heineken said it will withdraw its guidance for 2020 after seeing a “significant impact” on its markets due to the coronavirus.

 

Neil Wilson is chief markets analyst at Markets.com