Risk Off As US-Sino Tensions Rise, PMI's & US Jobless Claims

After an impressive rally in the previous session, investors are pausing for breath on Thursday.

Downtrend 2

After an impressive rally in the previous session, investors are pausing for breath on Thursday. Rising tensions between US and China and China and Australia are keeping risk appetite on edge, pulling stocks lower ahead PMI releases and US initial jobless claims.

President Trump escalated rhetoric against China pointing the finger at Xi Jinping for a disinformation campaign and propaganda attacks on both the US and Europe. Whilst Trump playing the blame game with China is nothing news, this is the first time that he has taken direct aim at Xi Jinping. Previously he has always maintained a strong relationship between the two. This change of tone is making the markets sit up and listen. Riskier assets are out of favour and flows into safe havens are on the rise.

GBP Remains Under Pressure
The Pound continues to fall away from Tuesday’s high of $1.2297, dragged lower by BoE Governor Andrew Bailey’s U-turn on negative rates, saying that they are “actively under review” for the first time in in the bank’s 324 year history. Whilst negative rates would encourage the banks to lend more, there is no guarantee that the demand exists. Furthermore, negative rates would exert more pressure on bank’s already squeezed margins. The bank will likely analyse how other economies have fared under negative rates before taking any decision.

PMI’s Pick Up But Stay In Contraction Territory 
In the UK PMI’s for both the service and manufacturing sectors, due for release today. Analysts are expecting to see an improvement from April’s worst ever prints. However, given that the lockdown in Britain has only eased very slightly so far in May, activity is expected to have only increased very slightly.

Analysts are forecasting the service sector PMI to increase to 25 in May, up from 13.4 in April. Manufacturing activity is expected to have increased to 36, up from 32.6. The level 50 separates expansion from contraction. A weak reading to pull the Pound lower.

PMI figures are also due from the Eurozone and individually from France and Germany. The trend across the board is the same – a pick up in activity as the rate of contraction slows. However, service and manufacturing sectors remains far from the 50 level which separates expansion from contraction.

US Initial Jobless Claims Hit By Backlog
US initial jobless claims are expected to show 2.4 million Americans filed of unemployment benefits in the week ending 15th May, the lowest since the start of the coronavirus crisis 2 months ago. Although still very elevated given where we are on the coronavirus curve. This is mainly due to a backlog of layoffs keeping the rate high. The total initial jobless claims over the past 2 months is expected to be over 39 million or 23.9% of the US workforce. 

As US states gradually ease lockdown measures and reopen their economies attention is shifting towards continuing claims data for signs of rehiring. So far, the reduction in continuing claims is not happening, with 24.76 million expected vs last week’s 22.83 million. 

Initial jobless claims and continuing claims have made for very grim reading over the past two months but recently they haven’t been moving the market. A very upbeat continuing claims, indicating a strong return to hiring could inject a serious dose of optimism into the markets but that is looking unlikely this week. 


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