Greed has given way to Fear? Or buyers of American stocks finally remembered the phrase “Where, where, are you crazy?” and see the light? Well, the S&P 500 cannot grow indefinitely when industrial production collapses at the fastest pace since the Second World War, and retail sales - from the beginning of accounting in 1992. When the Fed's Beige Book indicates that economic activity has “sharply decreased” throughout the country, and the number of applications for unemployment benefits for 4 weeks is ready to go over 20 million. Improving the epidemiological situation? Is it about him? Most likely going to open the economy before May 1, Donald Trump gives out wishful thinking. So is it time to take profits?
In March, large chunks of the US economy froze. It is in a deep pit, the start of the process of digging out of which will be given only when measures for social distance do not begin to weaken. In contrast to the report on the American labor market, data on retail sales and industrial production covered a full month. And in April it will not be better! In the second quarter, GDP will suffer enormous losses, and only hopes for its recovery in the third or fourth give the IMF the opportunity to talk about a 5.9% decline in 2020. How can the S&P 500 grow against this background ???
The fight against coronavirus costs money. According to estimates of the International Monetary Fund, world authorities have already spent $ 8 trillion, which is equivalent to 9.5% of global GDP. The G20 countries did not stint on fiscal incentives in the amount of 3.5% of the size of their economies, which is significantly more than during the previous financial crisis.
The magnitude of the fiscal stimulus
The IMF expects that public debt in 2020 will grow from 83.3% to 96.4% of GDP, including in developed countries - from 105.2% to 122.4%. In Italy, according to Rabobank estimates, it will increase from 134% to 150%, while using the principle of “every man for himself” in difficult times can cost a lot of euros. The unwillingness of the governments of the eurozone countries to go on the issue of coronabond has led to an increase in the yield of Italian bonds. The spread of their rates with German counterparts has grown to the maximum since the ECB decided to expand QE by € 750 billion. The increase in the differential yield of bonds of peripheral countries of the currency block and Germany indicates an increase in political risks, including the risks of the collapse of the eurozone, and puts pressure on the euro.
Nevertheless, the main driver of falling EUR / USD quotes was Fear, which replaced Greed, in the US stock market. The consensus forecast of Wall Street analysts suggests that the S&P 500 at the end of the year will drop by 8%. While it is down by 14%, however, most of the rally should fall in the second half of the year, for now it makes sense to take profits.
S&P 500 Dynamics
Source: Financial Times.
Closing long positions in the US stock market extended a helping hand to the greenback. The failure of the bulls in the euro to stay above the level of $ 1.0965 was evidence of their weakness. At the same time, a further fall in US stock indices will increase the risks of EUR / USD peaks to 1.084 and 1.076.
LiteForex Analyst Source
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