Risk sentiment tilted slightly to the softer side after Chinese equities, which had rallied sharply over the past several days, were sold into close, causing European indices and US futures to weaken and supported the dollar. Some investors were concerned that rising Covid-19 cases may mean more authorities will reimpose tighter lockdown restrictions after
Melbourne went into a 6-week lockdown and as a number of US states have put their reopening plans on hold. Global coronavirus cases have now hit 11.64 million, and the US is leading with 2.94 million.
However, up until now, investors have been ignoring rising cases of Covid-19, partly due to the fact that the death rate has been falling and also because of central bank and government stimulus supporting economic recovery. In fact, the UK Chancellor,
Rishi Sunak, was expected to announce £3 billion of energy efficiency measures aimed at boosting the struggling UK economy. Other similarly large fiscal stimulus measures have been introduced across many other developed economies as authorities tried to limit or the economic damage from the coronavirus pandemic.
So, it remains to be seen whether today’s selling of risky assets will turn out to be another (small) retracement in what is becoming a rising trend, or something more significant. Thus far, the major indices haven’t shown any signs of a major breakdown. The
Euro Stoxx 50 CFD chart, below, for example, shows a small pullback after running into resistance around the 200-day moving average. This index was testing key short-term support around 3300 at the time of writing, so it may have bounced by the time you have read this. Unless the series of higher lows and higher highs break, the path of least resistance remains to the upside despite today’s weakness.
Source: TradingView.com and ThinkMarkets
Meanwhile, it will be a quiet day for economic data. The main news which apparently had the most market impact was from
European Commission, which
revised its growth forecasts lower. The EU Commission now expects Eurozone GDP to contract by 8.7% this year, more than the 7.7% decline it had predicted in May. This was worse than analysts had expected. Meanwhile the 2021 GDP forecast was also revised lower to 6.1% from 6.3% previously. In other news, we saw a big jump in Italian retail sales (25.3% m/m vs. 15.0% expected), while German Industrial Production rose by less than expected (+7.8% vs. 11.0% m/m). Overnight, the Reserve Bank of Australia left rates unchanged at 0.25% as expected, while Japan’s Household Spending slumped (-16.2% y/y vs. -11.8% expected).