(18 MAY 2020)DAILY MARKET BRIEF 1:Market optimism holding up despite fragile fundamentals

Optimism over warm weather supporting the gradual return to normal activities following a more than two-month lockdown period globally holds equities in demand as commodity currencies hold to their gains with oil prices climbing above $30 for the first time since mid-March 2020 on hope of growing demand and output cuts. There are yet good reasons to consider that a reality check might occur, as market price action appears short-term biased. The remaining 10% of S&P 500 earnings are now turning to cyclicals (i.e. retail, media and travel), one of the industry that was most hit by the pandemic while the 2Q releases are likely to prove worth as the US $3 trillion Coronavirus relief package is expected to face opposition in the Senate after passing through the House of Representatives. Meanwhile, a resumption of Sino-American trade discord after new restrictions were added against Huawei by limiting chips supply favors safe-haven, the dollar gold and eventually Bitcoin instruments should the situation worsen. In this regard, a rapid V-shape recovery seems unrealistic as analysts EPS expectations continue to be pushed downward, as downside risk prevails.

Although “medical metrics” as stated by Fed Governor Jerome Powell should remain key data for now, it appears that negative economic data are set to follow, with most economies expecting to see a rebound in GDP figures not before 2021. On the wire, GDP figures for the first quarter in Japan are pointing at an annualized contraction of -3.40% (prior: -7.30%) and -0.9% (prior: -1.90%) quarter-on-quarter, thus maintained in recession and expected to decline by as much as -22% in current quarter according to estimates, which would mark a record low. Due tomorrow, UK labor, ZEW indicators in Germany and Europe as well as US housing data should maintain investors on the sideline ahead of Ascension Day. Brexit talks combined with speculations over negative interest rates in the UK should maintain the British pound under pressure. Currently trading at 1.2105, its lowest level since end-March 2020, the cable is expected to face a pullback along 1.2024, the 76.4% Fibonacci extension of 30 April 2020 high.