Global risks outweigh recent wave of optimism – Market Analysis – May 13

By: Miguel A. Rodriguez

09:45, 14 September 2020

As risks increase the global markets feel the heat and start to lose speed

The statements of Jerome Powell, chairman of the Federal Reserve, have been the trigger for the return of risk aversion in the market.

USA

Mr. Powell has said that without more government funding in the economy, in addition to what he has already done, the downturn would be much more prolonged than expected. 

The Fed president also ruled out negative interest rates like other members of this central bank.

These statements are of utmost importance because they not only do highlight the severity of the crisis, which had been largely underestimated in the investor community, but it explicitly recognizes that the Fed alone cannot cope with it and passes the buck to government fiscal policies. Still, Fed fund futures continue to discount negative rates by the end of the year. 

These comments do not seem to be to the liking of President Trump, who will surely attack the central bank as he has done on many previous occasions and will pressure him to continue relaxing his monetary policy.

The scenario that is presented is not brilliant and even less if we take into account another front opened by the Government that is heating up day by day. 

The confrontation with China is already almost complete. Today we have learned that government mutual investment funds will be banned from buying Chinese indices. This decision, if carried out, would raise the tension to levels never seen before.

All this has turned the general sentiment of the market into risk aversion, and the stock markets, not only North American but also European, have suffered a second day of losses.

Europe

In the European case, even more elements of uncertainty can be added, such as the confrontation between the German constitutional court and the European Commission for its judgment against the ECB's asset purchase policy. In this sense, nothing is yet definite and what is certain is that it will delay the stimulus measures that are essential not only for the European economy but for the sustainability of the EU itself.

Germany30 ended the session with almost a 2% drop. From a technical perspective, it has broken the trend line of the last bullish leg but still needs to drill the supports located at 10392, 10235, and 10157 that could signal the end of the current bullish correction and head towards targets located at 9328.


EUR/USD has not yet suffered the pressure from a stronger Dollar. The pair continues to move in a broad trading range between 1.0770 and 1.0990. Investors are not very active in the foreign exchange market, but more and more, the general opinion is inclined towards a loss of value of the single currency.


The big loser has been the Sterling Pound, which after a pull-back in the morning, has broken the reversal pattern that can be seen in the chart and points towards targets close to the 1.1900 area. The little hopeful signs of the evolution of the pandemic in the United Kingdom, together with the evident rush for the reopening that the prime minister Johnson is driving, discourages investors and arouses concern about the future of the British economy.


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