Stocks to extend surge higher on recovery optimism

As lockdown measures continue to ease, investors shrugged off geopolitical tensions and civil unrest on the streets of the US for Wall Street to finish at its highest level in three months.

The optimism carried over into Asia, with the Nikkei rising to its best level since February boosted by the first expansionary reading for Chinese services PMI in four months. The Caixin service sector activity data jumped to 55 in May, its strongest reading in almost a decade whilst jumping from 44 in the previous month. The data adds to mounting evidence hat the Chinese economic recovery is underway following the coronavirus lockdown earlier in the year.

Positivity in Asia looks set to spill over into Europe, with bourses pointing to a stronger start. The markets are keen to fall back into the familiar rhythm of “the only way s up”, boosted by cheap money and reopening optimism without fully digesting the economic hit and scars which are being left behind. Despite the downside risks, investors are remaining firmly focused on the positives.

Equities are pushing higher, along with oil and the antipodeans, meanwhile safe havens US Dollar and gold are once again on the back foot.

Service sector PMIs

Today’s PMI readings could be good example of the almost blind optimism in the markets. PMI readings for the Eurozone and the UK are expected. Spain is expected to see the service sector pmi rebound from 7.1 to 25 in May, whilst activity in Italy’s service sector is expected to have jumped from 10.8 to 26.5. The optimists in the market will focus on the huge improvement in activity in the sector, whilst the pessimists would be drawn to the fact that activity remain deep in contraction. As they saying goes, optimism is blind optimism.

Unemployment figures in Europe are expected to show a slow creep northward. However, the headline numbers are not expected to climb as high as US due to a range of government programmes that pay companies to keep staff employed even when they are not working.

ADP in focus

Today’s US ADP reading is expected to be another fine example of how keen the market is to ignore economic scars being left behind. Expectations are for a 9 million drop in private payrolls in May. A shocking number by all accounts. However, it would be a significant improvement on April’s 25 million decline. With the markets so focused on the recovery, May’s numbers are not expected to cause a stir.

Oil supported as inventories decline

The broad risk on sentiment, a weaker US Dollar and improving supply and end fundamentals are providing support for oil prices. According to API data, inventories decline -0.483 million barrels versus the addition of 8,731 million barrels the previous week. Attention is turning to the June OPEC meeting; traders are finding some reassurance from suggestions that Saudi Arabia and Russia are moving closer to agreeing a deal to extend output cuts.

WTI levels to watch

WTI is trading +2.5% in early trade at $37.87, it remains above the ascending trendline on 4 hour chart as it continue to cross the gap back towards early March’s pre- coronavirus $40.00 level.

Immediate resistance can be seen at $38.15 (overnight high) prior to $40.

Immediate support can be seen at 36.80 (today’s low) prior to $36.11 trendline support and $34.30 low (June 1st).