Positive sentiment dominates (Afternoon analysis 5.05.2020)

A period of 122 months long expansion in the services sector in the US ended in April with the strongest decline since 2009. However, the market sentiment is positive, also supported by the increasing oil prices. Market conditions may help a stronger zloty in the coming weeks.

Optimism, but with the spectre of a trade conflict

Tuesday was characterised by positive sentiment in the broader market. It was partly a result of the lifting of restrictions in the world, and partly the associated effect of rising oil prices, which today has had its fifth consecutive day of growth. The price per barrel of WTI oil exceeded 24 USD in the afternoon and 30 USD for Brent variety - for the first time since April 15th. The rising price of "black gold" not only has a positive impact on the general sentiment in the market but is also a kind of ceiling for the dollar.

The US currency's quotations returned some profits from the first phase of the day after the unexpected ruling of the German constitutional court. It gives a three-month ultimatum to the European Central Bank to explain the validity of the asset purchase programme. A moment after the New York Stock Exchange session began, the EUR/USD exchange rate reached nearly 1.09 (about 1.08260 around midday).

At the end of last week, sentiment deteriorated as the rhetoric of the White House administration (and the US President himself) on trade with China became more restrictive. Today's positive sentiment was supported by information from the Office of the US Trade Representative (USTR) that it is considering extending (for another 12 months) the exclusions of certain Chinese imports from customs duties. This is most likely not the end of the tariff topic, as Donald Trump seems to want to use tough negotiations with China as part of his presidential campaign. Therefore, we can still expect some fluctuations in the coming months.

The overestimated ISM has recorded the biggest drop since the financial crisis

In the afternoon, ISM's PMI data from the US services sector in April were published. These data indicated, of course, a recession in the sector, but they were slightly above expectations: 41.8 points against an expected 38.0 points. However, this was the lowest reading since 2009 and officially ended the 122-month expansion in the sector. As in the case of PMI indexes, e.g. in the eurozone or Poland, the ISM index data are overstated by extended delivery times (record in April 78.3 pts., 25% of the weight in the whole index). In normal conditions, they may indicate high demand, but in April it was a supply disruption. The real scale of the recession is, therefore, much greater.

Market participants, as in previous weeks, focus primarily on activities aimed at restarting the (partial) operations of the economies. In addition to countries in Europe, some states in the USA are already communicating the successive phases of (partial) easing of restrictions, including New York and California, the first and third states in the USA in economic terms, which also supports sentiment.

Given the domination of positive sentiment in the broader market, a slight recovery of sectors in May due to the loosening of pandemic restrictions, rising oil prices and a relatively stable dollar, a positive scenario for the zloty (and also for most emerging currencies) is being created. The Polish currency pared some of the losses, and in the afternoon the USD/PLN fell from about 4.20 to a range of 4.17-4.18 and the EUR/PLN to about 4.53. These are not significant changes in the context of the previous weeks, but the next ones may be slightly more positive for the zloty if there is no deterioration in relations between the US and China (which has grown to a somewhat higher rank than a few weeks ago).

Tomorrow's preview

Before midday, the final data of the PMI indexes for the services sector (and aggregated data) for the eurozone for April will be published. No changes are expected, and even small deviations are likely to have a marginal impact on the market (given that historical declines have had a limited impact). Investors' attention is likely to be much more focused on subsequent data from the US labour market.

At 2:15 p.m., the ADP Institute will publish a report on how many jobs were lost by the virus pandemic and imposed restrictions on the US economy in April. The median of market expectations indicates a reduction of employment in the non-farm sector by 21 million in April (vs 27 thousand a month earlier). On the one hand, this publication may increase fluctuations, suggesting what to expect from official data from the Labor Department on Friday. Still, on the other hand, the market reacts to negative data with little response. It seems that currently, the data would have to fall well below expectations in order to ultimately have a clear impact on the currency market (disastrous, the worst data in history seems to be already priced in).