(28 MAY 2020)DAILY MARKET BRIEF 1:S&P500 consolidates past 3000 ahead of US GDP data

US equities remained resilient to escalating US-China tensions, but trading was mixed in Asia.

The Nikkei (+1.00%) and ASX (+1.40%) extended gains, while Shanghai’s Composite (-0.35%) and Hang Seng (-1.82%) slid for the second day as Hong Kong’s special status came under scrutiny amid passing a new national security law that restricts rights and freedoms of its citizens. Further reviving worries was the US House vote to allow sanctions on Chinese leaders for human right abuses. Now there is a rising risk for a tit-for-tat reaction from Beijing, which could further hinder the trade relationship between the two countries.

Meanwhile, coronavirus death toll hit 100’000 in the US. Officials and investors keep their expectations high for the discovery of a magic vaccine before the end of the year, but the only thing they can rely on for now is the stable decline of new cases and the absence of signs of a second wave of contagion.

The S&P500 is now consolidating gains above the critical 3000 mark, at twelve-week highs. The current levels will be a make or break for investors. If the market eagerness to carry the recovery higher is stronger than the temptation of realizing profits, we could see the S&P500 targeting the pre-Covid levels – which is strange per se knowing how bad the businesses were impacted by the Covid shutdown. But this precisely is the charm of the Federal Reserve (Fed) intervention. The massive asset purchases and near zero rates are clearly doing the trick. The S&P500 already recovered nearly 70% of Covid-led losses and the cheap liquidity environment gives a solid base for more recovery across the financial markets. In this respect, the asset prices are, and should continue diverging from their underlying valuations, however the market forces in place will remain favourable of a persistent rise in prices in the long run.

US futures are up except Nasdaq, while activity in FTSE (+1.05%) and DAX (+1.26%) futures hint at further gains in Europe on Thursday.

With the mix of unpromising international and economic news, however, the momentum is what risk investors rely on before the announcement of the US GDP data. A consensus of analyst expectations points at a 4.8% contraction in the first quarter, but risks are tilted to the downside.

By Ipek Ozkardeskaya