Last week ended on a sour note as concerns over second round virus cases intensified; Apple’s decision to close some US stores in states where cases are escalating added to such concerns. This overshadowed earlier news that China would maintain its commitment to buying US agricultural goods. Although on the whole, equity markets had a positive week there is no doubt that nervousness is creeping back into the market psyche. Indeed it is notable that the VIX equity volatility “fear gauge” ticked back up and is still at levels higher than seen over most of May.
Economic recovery is continuing, as reflected in less negative data globally, but hopes of a “V” shape recovery continue to look unrealistic. In this respect the battle between fundamentals and liquidity continues to rage. Economic data has clearly turned around, but the pace of improvement is proving gradual. For example, last week’s US jobless claims data continued to trend lower, but at a slower pace than hoped for. A second round of virus cases in several US states including Florida, Arizona and the Carolinas also suggest that while renewed lockdowns are unlikely, a return to normality will be a very slow process, with social distancing measures likely to remain in place. Geopolitical tensions add another layer of tension for markets. Whether its tensions between US/China, North/South Korea, India/China or the many other hot spots globally, geopolitical risks to markets are rising.
The USD has benefitted from increased market nervousness, and from US data outperformance, with US data surprises (according to the Citi economic surprise index) at around the highest on record. JPY has bucked the trend amid higher risk aversion as it has regained some of its safe haven status. GBP was badly beaten last week selling off from technically overbought levels, amid fresh economic concerns and a dawning reality that a Brexit trade deal with the EU may be unreachable by year end. EUR looks as though it is increasingly joining the club on its way down. Asian currencies with the highest sensitivities to USD gyrations such as KRW are most vulnerable to further USD upside in Asia.
Data highlights this week include the May US PCE Report (Fri) which is likely to reveal a bounce in personal spending, Eurozone flash June purchasing managers indices (PMIs) (Tue) which are likely to record broad increases, European Central Bank meeting minutes (Thu), which are likely to reflect a dovish stance, and several central bank decisions including Hungary (Tue), Turkey (Thu), New Zealand (Wed), Thailand (Wed), Philippines (Thu). The room for central banks to ease policy is reducing but Turkey, Philippines and Mexico are likely to cut policy rates this week.