The risk associated with the US jobs report is being cast aside as markets move higher once again. Travel stocks lead the way, while oil and gas stocks rise ahead of the OPEC+ meeting. Meanwhile, dollar weakness has helped drive GBPUSD higher despite Brexit fears.
Another day of gains looks to be taking shape in Europe, with the value theme seen throughout the week maintained despite the significant headwinds that lie ahead. Traders have got very used to the idea of markets being far removed from the stark reality of economic decline.
Today looks set to be a perfect example of that, with markets on the rise despite predictions of a 20% unemployment rate in the US. With the Fed continuing to load up on billions of dollars’ worth of assets every day, this crisis has been characterized by the swiftness of central bank and government support.
In a week of sharp gains, there would ordinarily be a bout of profit-taking given the risk of a market reversal. However, we are in a curious position where US data has deteriorated at a historical rate, yet markets appear less interested than ever.
It has been a big week for the travel sector, with the prospect of a surge in travel for July boosting sentiment amid a flight to value over recent days. With the likes of IAG, Carnival, and easyJet leading the FTSE 100 higher, we are continuing to see traders’ favor those heavily hit stocks in a bid to find returns given the outperformance within growth stocks.
The FTSE 100 has lagged its German and US counterparts’ thanks in part to the importance of the oil and gas sector. However, with OPEC+ likely to extend their production cuts over the weekend, there we are likely to continue seeing crude recover as demand improves.
The dollar has been hit hard this week, as haven demand dries up and the focus on nationwide protests dampens expectations of a Trump election victory in November. Starting the year as the clear favorite, Trump has seen his lead erode to now find himself behind in the betting against Democrat Joe Biden.
One thing that Trump has been is heavily focused on economic and market performance, which highlights the risk element that will increasingly come into play as we approach the election. Even the pound has managed to heavily outperform the dollar this week, with ongoing Brexit fears failing to stifle a sterling surge.
Brexit talks are expected to end with little progress, with the impending deadline looming for the UK to agree an unlikely extension to the transition period.
With the BoE warning banks to begin preparations for a no-deal Brexit, we are likely to see markets increasingly price this possible disorderly exit from the EU as we move through the second half of the year.
Joshua Mahony is Senior Market Analyst at IG
