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Old 25-05-2020, 08:56
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Default Re: Tickmill UK Fundamental Analysis

EURUSD Trade Idea: Risk of EU Fragmentation and Declining Risk Premium in the Euro

Asian and European equities caught little attention from buyers on Thursday, S&P 500 futures are looking for catalysts to break the 3000 mark, although they have less and less chances to do so because of expansion of anti-Chinese measures and intensifying anti-Chinese rhetoric in the United States. Recall that Congress approved yesterday a bill that allows blocking access for Chinese companies to the US stock market if they fail to “prove” their independence from the Chinese government. A few hours after the bill was passed, Trump attacked China again on Twitter, effectively interrupting the S&P 500’s hike to the 3,000 mark.

According to BoFA survey of investors, the share of hedge funds joining the rally in the stock market rose from 15% in April to 34% in May. However, fund managers maintain a record position bias to cash, apparently considering the rally a speculative impulse, “rally inside the bear market.” More than half of the fund managers interviewed said that among the potential “black swans” for the market, the first place takes a second outbreak of Covid-19 leading to a lockdown, in the second place – permanent job losses in the US labor market, in the third – the collapse of the EU. It’s pretty much clear that any information affecting the odds of these risks being realized will be the dominant factor in investor sentiment in the near future.

Regarding the risk of fragmentation in Europe, we see that credit risk premium in the yield on the debt of the most problematic debtors, for example Italy, continues to dwindle. Over the month, the yield on 10-year Italian bonds slipped from 2.3% to 1.6%. The idea of ​​a trade on EURUSD may be that the premium for this risk in EU assets will continue to decline with the decline of this risk, so the pair should be finally able to test goals above 1.10. Technically, in the horizontal channel, we can see completed pullback, which wasn’t the case during past runs to 1.10:

EURUSD Trade Idea

Consumer confidence in the Eurozone is responding positively to lockdown easing. In May, the indicator moved in positive direction, changing from -22 to -18.8 points. At the same time, it was expected that it would fall to -24 points. Consumer sentiment is a leading economic factor, primarily for consumer spending component of GDP. Nevertheless, the Eurozone manufacturing PMI in May indicated that the number of companies reporting a reduction in output was rising, albeit at a slower rate than in April.

Separately, in the German economy, we see weak dynamics of manufacturing PMI and the faster recovery of PMI in services sector, which is consistent with the dynamics of consumer confidence. The layoffs had not yet managed to overwhelm Europe, government money transfers kept consumption from decline, which was reflected in a faster restoration of the services sector. Production PMI in May at 30 points is another argument in favor of the fact that it’s unlikely to see rebound in manufacturing, which means that it is too early to think about slack in employment.

Japan’s exports and imports declined slightly less than anticipated. Of course, more interesting is the change in exports (about 19% of Japan’s GDP), in the context of a number of other export-oriented Asian countries (for example, China), where export data also pleased in April, this paints a more favorable picture of foreign demand.

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