UK stimulus plan boosts sterling – Gold past $1800 – Eurogroup meeting, US jobless claims

Equities in Shanghai (+1.03%) extended gains for the eighth consecutive session, still surfing on the wave of optimism that more central bank and government stimulus is underway to maintain a ‘healthy’ bull market to tackle the Covid-led economic slowdown in China. Investors left aside the worries that a fastening Chinese inflation would interfere with plans of more stimulus and the anxiety over the rising US-China tensions over Hong Kong. The Hang Seng (+0.47%) gained, as the Nikkei (+0.93%) and Topix (+0.53%) ticked higher following losses earlier this week.

In the US, Nasdaq topped at 10700 on the back of persistent inflows in tech stocks, as the S&P500 (+0.78%) and the Dow (+0.68%) ended a choppy trading session in gains. Big US companies continue thriving on expectation of more fiscal and monetary stimulus, as the Federal Reserve (Fed) has no choice but to ramp up support due to the rising Covid risks on its economy. Number of infections in the US topped 3 million, and California reported its biggest daily jump.

 

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The US unemployment claims could reveal a negative surprise today, on the back of rising new cases in some states, and slower business reopening. But the market reaction to data becomes increasingly unpredictable.

The stock markets are increasingly shifting away from the underlying economic fundamentals. The valuations are now strongly driven by stimulus expectations. Bad news is perceived as good for more stimulus and supports the actual stock rally, at least in big US stocks. The certainty that money will continue pouring into the financial markets give a piece of mind to risk investors. There are lingering risks of sudden, sharp headwinds, but first, the market reaction to news becomes increasingly blurry, so the timing of a potential correction is unpredictable. And second, the downturns are expected to remain limited due to a solid buying pressure as prices retreat.

In individual company news, Google dropped its plan to offer a large cloud service in China as rising geopolitical tensions between the US and China increased worries about the Chinese government’s obsession to control the data flow within its borders. China’s online platform is sure an eldorado, but will remain troubled waters for foreign players as the Chinese policy on data is being tightening over the past years, even though China looks increasingly open to the world from trade and financial perspectives. Anyway, Alphabet’s share price will certainly not be impacted by the news and remains on track for challenging the historical high of 1530 seen before the Covid sell-off.

Activity in European futures hint at a positive open on Thursday.

Meanwhile, demand in safe haven assets is firming with increased inflows in US treasuries, Swiss franc and gold.

Gold cleared the $1800 resistance and rallied to $1820 per oz on stops. Whether the gold’s strengthening positive momentum is due to the slippery risk markets or rising speculation that the advance could stretch to $2000 per oz, the feeling that gold might have been bought too fast in a too short period of time should encourage a pause in the short term. The higher the price of an ounce, the higher the risk of a sharp downside correction.

In the FX, the US dollar index hit a four-week low as capital continued flowing in riskier assets.

The euro advanced to 1.1370 against the greenback ahead of today’s Eurogroup meeting. Investors are craving for an agreement on the 750-billion-euro rescue package, which would restore confidence in the Eurozone’s integrity and the euro. But the lack of progress or discouraging news could abate the optimism in euro and compromise the single currency’s recent advance against the dollar.

Sterling hit a three-week high on the back of a larger-than-expected mini budget to stimulate the British economy. The UK’s latest stimulus plans near 1% of its GDP versus 0.5% expected due to higher VAT cut for hospitality and entertainment. Although the latest announcement is significantly less than the measures the British government is about to roll out – nearing 7% of the UK GDP, news are positive for recovery and sterling. Combined with a broadly softer US dollar, Cable could extend gains toward its 200-day moving average, 1.2685, but should encounter solid resistance at this level as mid-term sterling bears will likely take the opportunity to strengthen their short positions on lingering Brexit headaches.

Finally, WTI crude remained resilient to the surprise 5.7-million-barrel rise in US inventories last week. The short-term direction is unclear, as investors hesitate whether it is a good idea to carry the rally further while the combination of lower demand prospects and higher supply tilts the balance to the opposite direction. Inability to extend gains above the $40 mark hints that a downside correction could be around the corner.