No such thing as a boring week
It’s been another interesting week in the financial markets. One of economic reopens, second waves, sharp warnings, recession and more. The week ahead will not be less eventful as investors seize the reality of the situation we all face while taking into account the seemingly endless supply of monetary support.
Add all this to the renewed tensions between the world’s two largest economies. Given that a trade war between the two was once considered a major risk to the global economy, it is extremely unwelcome now. But then China attracts a lot of attention around its handling of coronavirus in the early stages of detection, and Donald Trump faces a six-month election (in case anyone has forgotten). We could see a cold war scenario with increased hostilities, with neither party wanting to pursue anything more for the rest of the year.
Last, but certainly not least, we have oil. Last month’s jump to minus $ 40 on the May contract is not expected to see a repeat. A lot has changed since then. But by the end of June on Tuesday, who knows what chaos might ensue. Prices are inflating after an impressive rebound in recent weeks, perhaps even vulnerable. The start of next week will actually be very interesting.
The U.S. economy’s staggered reopening expects to show incremental improvements in economic data this week. U.S. business operations are expected to jump from record lows when some states begin to reopen. Housing information is expected to be persistently poor, while weekly initial unemployment claims are expected to continue to coincide with continuing demands.
The primary driver of global equities is still improving economic data as global economic activity gathers and renewed outbreaks will disrupt economies’ reopening. Investors will be closely watching the daily COVID-19 updates to see if children continue to see spikes in new cases and whether new hotspots are emerging.
It is also important to keep an eye on US-China relations. President Donald Trump seems determined to hold the tough speech against China. Trump’s threats to cut ties with China are almost ridiculous as it would create an unwelcome shock to a very weak US economy. China will not return to Trump’s threats and will quickly announce countermeasures if he comes with any of them. A complete meltdown of US-Chinese relations is not expected, but intensified tensions will only contribute to a risk-free trading environment.
Party politics is expected to end eventually, as large parts of the country are still struggling from the shuttered economy. Nancy Pelosi’s $ 3 trillion package is required, but Republicans will require many changes. The progressives are also unhappy with the bill, but it’s hard to imagine any stimulus coming in the near future. Both sides of the aisle are likely to try to avoid further financial disaster, and risky assets should see some support coming to another bill.
The first week of easing the closure has brought confusion, debate and worrying pictures of packed tubes. It has also been accompanied by news that the worst monthly financial contraction has been recorded (data back to 1997) and 2% as a whole in the first quarter. When you consider that the shutdown first started a week before the end of the quarter, imagine what Q2 data will look like.
Next week, Andrew Bailey, along with three of his MPC colleagues, will answer questions from the Treasury Select Committee on the economic impact of coronavirus as the country passes the top of the first phase. I don’t expect there to be any surprises, just hard truths, something investors seem willing to ignore.
Germany is officially in recession after revising its fourth quarter to -0.1%. Of course, it received the good old “who cares” in the markets. Mild technical recessions are something to aim for when you are in the midst of a severe recession with tremendously uncertain vision. The euro area as a whole just avoided a similar fate, but again, who cares.
On a more promising note, the number of cases and deaths continues to decline, which is promising. With easing measures facilitating, this will be key in the next few weeks for further easing and economies returning to something similar to normal.
It appears that efforts to stop the collapse of Lira by restricting foreign transactions and preventing short-selling are working, with the currency recovering from its record low against the dollar this week. None of this changes the fact that investors are very concerned about the Turkish economy and its ability to deal with coronavirus.
However, CBRT is expected to continue to lower interest rates next week – 50 basis points consensus – despite the currency weakness and potential inflation ahead of us. Markets have forgiven in the past, but may not feel in such a generous mood now. Of course, the restrictions are likely to affect this in the short term, but will not last forever.
The South African Reserve Bank is expected to cut interest rates by 50 basis points next week, although forecasts vary. The economy was already in disarray and severe shutdown measures have not helped. The country has already lost its final investment quality rating, so S & P’s review next Friday should not be of much interest. Pressure may grow on Ramaphosa in the coming weeks to ease the restrictions, with some already questioning whether the economic damage is greater than the coronavirus itself.
The economic recovery is expected to continue in China with the PBOC this week signaling more powerful and far-reaching stimulus measures are underway to support growth and jobs. We expect lending prices to see further cuts. Two dark clouds on the horizon are secondary COVID-19 outbreaks occurring in secondary cities near North Korea and Russia. The trade situation with the United States is in danger of deteriorating. US administration members from the President down, label COVID-19 the “Chinese plague” and threaten new sanctions if China fails to meet its trade agreement obligations. The presidential election is fought for who is the hardest for China.
The Government of India has loosened the shutdown rules and financial markets will be watching closely to see how bad the next wave of cases will be. The financial system is facing renewed pressure following the closure of Templeton funds there last month. This has led to a continued flow of funds out of the financial sector outside the bank and threats to deepen the freezing of credit to SMEs. The government’s new budget threatens to roll out private borrowers with their deficit financing,
Australia’s employment fell by 574,000 in April. ABS said the real number is actually much higher. However, easing is being eased across the country, which should see a strong rebound. The AUD has fallen this week on world economic fears. High beta to China and world trade leaves Australian markets vulnerable to downward pressure. No data of significance next week.
Japan has extended the nationwide state of emergency to the end of May with 34 prefectures reopening next week – not Tokyo or Osaka. 2. additional budget formulated. BoJ says willing to increase the easement if needed. USD / JPY continues to rank. With risk aversion returns, USD / JPY could fall sharply.
Oil prices go up once again as WTI closes in at $ 30 per share. Barrel, nearly $ 70 above the level it fell to almost a month ago. I mean, it’s staggering, even when you forget the negative prices. There is clearly another sense of the oil market’s headline in this contract expiry, where production cuts have been enforced globally, either through agreements or unilaterally.
But will that be enough to ward off yet another moment selling panic? The odds are certainly reduced and there is no sign of caution among the traders, but there is plenty of time yet. There is a fine line between self-confidence and complacency, and we can only hope that the line has not been crossed, or early next week it can quickly loosen up.
In lockdown, it can be easy to lose track of what day it is, but take a look at a gold card and the Friday feeling shining through. Consolidation over the last month has made this ongoing daily comment quite painful at times. You would swear that we live in relatively mundane times.
Finally, it seems that gold is catching up with reality, maybe even – dare I say it – act like a safe haven (ish)? The launch came under some weakness in the risk markets, and although they have bounced back, I wonder if the gold draw is sustained more by technical factors than the basics that triggered the move in the first place. Whatever the reason, a $ 1,750 break could kick it into a higher gear.
Bitcoin enthusiasts are some of the most bullish people you come across. Whatever happens, it is bullish for bitcoin. When central banks around the world throw everything they have into the crisis, I imagine there are a lot of very, very bullish forecasts right now. We’ve seen three runs for $ 10,000 and the error doesn’t seem to shake them at all. The excitement is palpable. If this breaks down, it can be a very bullish catalyst.