ECONOMETER

A number of holidays this week points to quieter week for markets.  However, as I note below, there are still a number of risk events on the horizon. 

A growing focus is the divergent trend in the path of Covid in emerging markets and in developed economies, with the former especially in some parts of Asia, Latin America and Africa, seeing a significant worsening, which will likely result in delayed recoveries and lead to some EM asset market underperformance. 

India’s Covid situation worsens dramatically

As all the headlines show, India’s Covid situation has become particularly dire though a lack of large-scale lockdowns has led to only a limited mark down in growth forecasts there even as risks intensify.  Already there has been a political cost, with Indian PM Modi’s BJP party losing a key state election in West Bengal and losing ground in other state elections.  Virus cases are still on the rise and sadly the picture will worsen before there are any signs of improvement.  

Covid cases in India have been trending higher since February and hit record highs this weekend, above 400,000. The number of cases is approaching 20 million, with over 215k deaths, while the country has administered 157.2 million vaccine doses.  However, at the current rate of vaccination of 2.26 million per day, it will take 2.2 years to cover 75% of the population with a two-dose vaccine. 

US dollar consolidating

After losing ground in April (the USD index DXY fell close to 3% over the month) the US dollar (USD) looks likely to consolidate this month.  USD positioning has already improved over recent months, suggesting limited scope for short covering.  Seasonal factors are unlikely to be particularly influential this month.  However, I am cognizant that cross asset market volatility has eased significantly, while risk assets are already priced for a lot of good news.  Nonetheless, risk factors are increasingly rising, especially increasing Covid cases in many emerging markets as noted above.  This leaves the market prone to bouts of risk aversion, which could result in some bouts of USD strength amid an overall backdrop of consolidation.

Key data and events

This week is an important one for both data and events.  There are several central bank decisions including in Australia (Tue), Thailand and Poland (Wed), Malaysia, UK, Turkey, and Brazil (Thu).  None of the central banks are expected to change policy settings except Brazil, with the consensus looking for a 75bp hike there.  In the UK, there is uncertainty over the future path of QE and whether the Bank of England extends asset purchases or takes the first steps to bringing asset purchases to an end echoing the Bank of Canada by announcing tapering. 

On the data front, the main highlights include the US ISM surveys (today and Wed), US April jobs report (Fri) and China trade data.  Both the US ISM surveys and payrolls are likely to reveal robust readings.  Fiscal stimulus and easing Covid likely helped to boost US jobs growth in April while the unemployment rate likely fell.  Meanwhile the ISM surveys will likely remain around historical highs for similar reasons.  Overall, the data will continue to paint a picture of strengthening US economic recovery. Meanwhile China trade data is likely to reveal strong exports and imports growth, though much of this will likely be due to base effects.