A dead cat bounce or a sustainable recovery?

The jobless claims in the US rose past the 3 million mark last week, a sign that the covid-19 has started taking a severe toll on the US labour market and the US now has the most coronavirus cases in the world, hinting that the situation is about to get worse in the coming weeks.

But bad news was good news for the market. The US stocks indices rallied for a third consecutive day on hope that the tragic data would encourage the House of Representatives to approve the $2 trillion rescue package quickly. A vote is due today. House Speaker Nancy Pelosi said that the package will be approved with an overwhelming majority.

The Federal Reserve (Fed) Chair Jerome Powell on the other hand said that the Fed ‘will not run out of ammunition’ and will continue supporting the economy if more stimulus is needed.

The US dollar retreated for the third day against most of its G10 counterparts, but the US 10-year yield remained little changed near the 0.80% mark, as most investors remained skeptical about rushing toward the risk assets too early.

Coming sessions will show whether this week’s stock rally was a dead cat bounce, or the start of a sustainable recovery.

Trading in Asia was mixed, with most leading indices in positive except stocks in Australia and New Zealand. China’s announcement that it will close its borders from Saturday may have triggered an early downside correction in the antipodeans.

Activity on European and US futures hint that there will be some profit taking before the weekly closing bell, as well.

In the US, even if the House passes the historical fiscal aid package with flying colours, we could see a retreat in US stock prices in a typical buy-the-rumour-sell-the-fact behaviour.

Due today, the personal income and spending in the US could show some signs of weakness in February due to the coronavirus outbreak, but the real negative impact will likely start to be felt in March data. The University of Michigan’s consumer sentiment index could however provide a better perspective on the souring mood across the US at today’s print.

Gold is headed for the biggest weekly gain since 2008, and a part of its advance is explained by the thinning physical supply as refineries slowed or ceased activity due to the coronavirus shutdowns. But the latter caused liquidity issues across the gold markets, leaving traders wondering if the yellow metal offered the right protection through the shaky waters. Gold remained capped below $1650 per oz.

WTI crude consolidates a touch below $25 a barrel and will likely gyrate within the $20-$25 area, with a greater possibility of breaking this range to the topside.  

In the foreign exchange markets, the EURUSD rallied to 1.1086 on a broadly softer US dollar. An improved risk sentiment and a further haven outflows from the US dollar could pave the way for a further euro recovery toward the 1.12 mark.

Cable extended gains to 1.23, but anxieties that the UK will have to deal with the coronavirus crisis alone should cap the upside in Sterling near the 1.25 handle against the greenback. At its Thursday monetary policy meeting, the Bank of England (BoE) warned about the long-term damages to the economy with companies running out of fuel and widespread job losses across the country. The bank said it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy” after having already lowered interest rates twice this month to the historical low of 0.10% and expanded its asset purchases program by 200 billion pounds.

Elsewhere, the Reserve Bank of India (RBI) lowered its benchmark rate by 75 basis points to 4.40% and its reverse repo rate to 4.15% in an emergency move. The USDINR rebounded from 74.30 and is preparing to close the week above the 75 mark. However, with carry traders having already quit the market, the lower rates should not have an additional negative impact on the rupee. Right now, it is all about the fglobal risk sentiment. An improved mood should slow down the rupee's appreciation despite lower interest rates.

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