MARKET WRAP: Calm Returns as Equities & Oil move Higher, Dollar Falls

Calm returns as equities & oil move higher, dollar falls

markets stabilise
Markets stabilise

It looks a little brighter out there in markets on Friday. Things started to stabilise on Thursday with the dollar slipping back from a gargantuan week of gains and Wall Street finishing with narrow gains.

European shares look set to open in the region of 2% higher, which now seems like a small gain relative to the turbulence in markets this week.

It’s too early to say the new central bank policies are working. There is at least an appreciation in markets that central banks aren’t taking the situation lightly. Governments are promising big things but there are big questions about how the whole thing can work. It’s a tough ask to get workers and businesses the cash they need to stay afloat in time.

There’s a chance that markets can keep the sense of calm into the weekend so long as the prospects for big spending from the US and Germany next week stay on track. We are watching for words of a delay from top Democrats because the proposed White House $1 trillion spending package ”prioritises corporations over families”

There were some specific market dislocations that the financial measures from the central banks are starting to relieve. The ECB’s €750bn bazooka has helped stabilise the madness in Italian debt markets and the discount swap lines created by the Fed should prevent dollar shortages.

Bank of England cutting UK interest rates to 0.1% and restarting QE had the unusual effect of lifting up the pound. Sterling finished Thursday higher after touching 3-decade lows. If the dollar is beginning a pullback that by itself could be enough for GBPUSD to rise back toward 1.20. The drop through 1.20 was a game-changer for the pound and speaks to a specific concern about how the UK economy can weather COVID-19 and trade negotiationsSomething material would need to change to see the pound get its mojo back. One thing that could do it would be extending the transition period beyond the end of 2020.

News of the coronavirus spread is a mixed story. Taking the “good” news first – South Korea has seen the number of cases dip below 100 again. That raises hopes that another country outside China is on a path to zero new infections. The bad news is that there have now been over 10,000 deaths from the coronavirus worldwide. The Italian death toll has now overtaken China. California has issued a state-wide stay at home order.

The rebound in oil markets is a contributing factor to the greater calm in wider markets. Crude oil futures are around 4% higher on Friday having jumped 24% for the biggest gain ever. Russia has said rather bluntly that it sees the Saudi moves as “blackmail” but it looks like they are willing to talk. We are not hopeful for a new OPEC+ supply-deal but the probability has improved this week.

Opening calls

FTSE 100 set to open 204 points higher at 5355

DAX 30 set to open 367 points higher at 8977

S&P 500 to open 50 points higher at 2459.

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