FED Chairman: Q3 2020 will be recovery time – Market Analysis – May 18

Market sentiment turns optimistic due to FED positive news

Confidence has suddenly returned to the market.

It all started over the weekend with statements by Federal Reserve Chairman Powell in which he was optimistic about the evolution of the economy. He expected that from Q3 on, the activity would begin to recover, but without specifying when the 2019 growth and employment levels would be reached. 

To do so, he stated that there were still monetary policy resources available and that they would implement these when and if necessary. 

These statements contrast with those made by the prestigious economists of Harvard University, Reinhart and Rogoff, well known during the 2008 crisis for their research on how to get out of it, who rule out any possibility of V-shape recovery, stating that the uncertainty levels are still high and that the rate at which consumption resumes and supply chains are reinstated will be slow. Some analysts see political pressure in the words of the President of the Federal Reserve, which has no place in the opinions of prestigious academics.


But if to some very promising statements by the President of the world's first central bank are added news that the production of a vaccine against the virus is already imminent - in the case of Moderna laboratories - enthusiasm is triggered. 

However, the world's epidemiology experts say that a safe vaccine can only be obtained if the entire testing process is carried out, which would last for more than a year.

USD based equities

The American indices have shot up an average of 3%. In risk-on mode, the market has cut long positions in Dollars, Yen, and Swiss Francs that had acted as safe-haven currencies and caused corrective movements in all the Dollarpairs and Yen crosses.

EUR/USD has risen more than one figure, overcoming the 1.0900 barrier and returning to the wide range 1.0770-1.0990 in which it has been traded in recent weeks.


The same has happened with the GBP/USD pair that has corrected a large part of the losses of recent days. In this case, the high possibility that the Bank of England decides to extend its asset purchase policy and even that it implements negative interest rates will be an element that weighs on the Sterling.

EUROPE

There has been another factor that has strongly influenced the recovery of the euro. Close to the European session closure, it has been published that Merkel and Macron back a fund of 500 billion euros for the restoration of the EU economy. 

It is important news that would serve to alleviate the economic uncertainties of the Eurozone, mainly in the southern countries. Although the details of this plan remain known and must be approved by the European Commission and the parliaments of each member country, it is undoubtedly a positive element.

Germany30 has had an extraordinary rise, slightly above 5%, exceeding the previous daily maximum of 11056 and opening the way to new highs, of course, if the North American indexes remain upward or stable.


GOLD opened the day with a strong upward momentum that brought it up to $1,746. Still, as market sentiment turned to risk appetite, investment flows turned to other risky assets and ended correcting lower over 10%. However, even with a risk-on market, gold could continue to be bought basically due to the extremely accommodative monetary policy conditions that central banks have implemented and plan to maintain for an extended time. 


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