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Beijing tackles new COVID-19 outbreak - DAILY MARKET UPDATE

Chart of the Day: EUR/GBP (year-to-date)

•    Beijing locks down: businesses open but schools close
•    Day 2 of Powell testimony
•    US retail sales surge by record in May
•    Economic data: UK / EU / Canada CPI
 

MARKETS


Markets head into Wednesday with mixed blessings following a volatile session on Tuesday that ultimately saw bulls win out with strong equity market gains. While risks like new coronavirus cases in Beijing and North Korea destroying a joint liaison office with the South came into play, ultimately investors weren’t blown off course from the optimism inspired by Federal Reserve plans to buy individual corporate bonds.

Strong US retail sales figures helped the US dollar rise alongside stock markets, as did a warning from Fed Chair Powell that corporate bond purchases would be tapered if market functioning continues to improve. Gold saw small gains alongside oil prices, which were firmer by nearly 3% on the day. 
 

GURU WISDOM


The trend is your friend until the end when it bends.” - Ed Seykota
 

Beijing locks down


The Beijing local government raised its emergency response level to 2 from 3 in response to new coronavirus outbreaks in the city. The new response level meant the closure of schools and advise not to travel out of the city unless necessary. Businesses remain open in order to continue the economic recovery. Haven assets like gold gained ground amid the heightened uncertainty and regional equities could be pressured if the lockdown tightening risks impairing the Chinese economy.
 

Powell testimony


Having already committed to corporate bond purchases the day prior, it was difficult for Powell to do any wrong in the eyes of the market. However Powell caused some ruption in testimony to the Senate Banking Committee today when he said “if market function continues to improve, we will taper the corporate bond program.” Emphasising the point he added; “I don't see us wanting to run through the corporate bond market like an elephant.” 

From a direct market forces perspective, the more the Fed buys and the quicker it does it, the more encouraged investors will be to do the same. So of course any talking of tapering – or specifically reducing – corporate bond purchase before they begin was a drag on buying momentum.
 

Retail Sales Impress


May US retail sales blew above expectations, rising 17.7% month-over-month – the most on record. 

Coming up on Wednesday, inflation data for May will be in focus. UK CPI is expected to fall to 0.5% from 0.8% year-over-year, a day before the Bank of England meeting. Eurozone CPI is expected to hold steady at 0.1% y/y and Canada CPI is forecast to fall to 0% from 0.2% prior.
 

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