Positive sentiment despite bad information (Afternoon analysis 23.04.2020)

The PMI data from the US were only slightly better than the analogous data from the eurozone, but they were also dreadful. The President of the European Central Bank warns about a 15% drop in GDP. In the early afternoon, the market was dominated by positive sentiment, which began to weaken the dollar at the beginning of the US session.

April is written off, but the market is still full of hope

The market reaction after the poor PMI data from the eurozone was relatively limited in the early afternoon. The euro was experiencing a slight loss, but the dollar appreciated globally (the EUR/USD was around 1.08), as well as the yen, which is perceived as a safe haven (the EUR/JPY pair was below 116, the lowest in three years). This somewhat weaker sentiment in the foreign exchange market was not reflected in all asset classes, including the equity market, where we still observed (nearly 1%) growth in the afternoon.

Partly this may be explained by the fact that the data are so bad that the reference point is practically missing and the equity market is looking beyond the current macroeconomic data and companies' performances towards easing the restrictions and revival of the economies. Fiscal and monetary stimulation somewhat helps to maintain a relatively good sentiment in the equity market. Still, it is higher than in the debt and currency markets, which are assessing the pace of opening of economies somewhat more cautiously.

The US Department of Labor published weekly data on jobless claims before the beginning of the trading session in the USA. Last week, 4.427 million claims were submitted, slightly below expectations at the level of 4.5 million. However, in the current situation and with such figures, it can be considered to be in line with expectations (even before the pandemic, weekly claims were at the level of slightly over 200 thousand each). Since the pandemic outbreak, in the last five weeks only, about 26 million claims have been submitted, which can be converted into an unemployment rate of about 20%.

One quarter after the opening of the New York market, the IHS Markit also published PMI data in the US for April. The index for industry fell from 48.5 pts. to 36.9 pts. (1.9 pts. above expectations), and for services from 39.8 pts. to 27.0 pts. These are not as low data (especially in services) as in the eurozone, but they are also disastrous and indicate that the economy practically ceased in April. PMI levels may still be even slightly overestimated by the structure of the index, which takes into account longer delivery times as positive for the index.

In the afternoon, there were also reports from the Japanese agency Nikkei stating that during the upcoming Bank of Japan (BoJ) meeting, an unlimited bond-buying program will be discussed. This information reversed a large part of the growths the yen had generated earlier in the day and probably reinforced the positive sentiment prevailing in the early afternoon in the equity market.

Bloomberg reported that Christine Lagarde, President of the European Central Bank (ECB), was to tell European leaders at today's summit that they had done "too little and too late". She also warned that the eurozone's GDP might fall to 15%. Nevertheless, with the beginning of the session in the USA, the sentiment on the market was clearly improving despite poor PMI data or Lagarde warnings. These positive sentiments also translated into a drop in the dollar's afternoon quotations - the EUR/USD pair rose at a breakneck pace from below 1.08 to 1.085, which also allowed the zloty to pair losses to the US currency: in the afternoon, the USD/PLN pair fell back below 4.20. Sustained positive sentiments on the market should protect the zloty against further depreciation in the following hours, and the Polish currency should rather move around current levels. However, the prevailing positive sentiment does not reflect the current economic situation, which may result in increased fluctuations in the following weeks.

Tomorrow's preview

At 10:00 a.m., the ifo Institute will publish April's business climate index data for German entrepreneurs. The median of market expectations indicates another drop to 79.7 points (from 86.1 points). The expected reading would be slightly below the bottom line of the financial crisis just over a decade ago, although the disastrous PMI data from the eurozone (including Germany) suggest that the reading may turn out even lower. This may slightly worsen the general sentiment in the market and ultimately contribute to the continued growth of the dollar.

One hour before the New York session starts, at 2:30 p.m., the Census Bureau will provide data on orders for durable goods in March. The consensus indicates their decrease by 12% on a monthly basis (by 6.3% if transport orders are excluded). Although market participants' attention is now focused more on the following months and hopes for a return to a higher level of activity, the order data may shed some light on the scale of the drop in activity in the US, as well as give indications of industrial production.