Opening Up

Attention is squarely going to be on efforts to open up economies in the days and weeks ahead.  Most US states are opening up to varied degrees while the same is happening across Europe.  The risk of course is that a second or even third wave of Covid-19 emerges for some countries, as is being seen in some parts of Asia, for example Korea where renewed social distancing measures have been put in place after a fresh cluster of cases in clubs and bars there.

However, governments will need to weigh up these risks against the growing economic costs of lockdown, which will by no means be easy.  Even as social distancing and lockdown measures are eased, it will likely be a gradual process, with activity likely to remain under pressure.  This is when the real test for markets will take place.  While markets have clearly been buoyed by unprecedented stimulus measures, especially from the Federal Reserve, which could continue for some time, fiscal injections will run their course over the next couple of months.

As revealed in April US jobs data at the end of last week the costs in terms of increased unemployment has been severe. The US unemployment rate hit a post war high of 14.7% while 20.5 million people lost their jobs.  This news will be echoed globally. Markets were expecting bad news and therefore the reaction was limited, but the data will nonetheless put more pressure on policy makers to keep the stimulus taps open.  Discussions are already in place between US Republican and Democrats over a new package, though disagreements on various issues suggest a deal may not happen soon.

Another spanner in the works is tensions between the US and China.  The US administration has become more vocal on blaming China for the virus, over recent weeks.  This had threatened to undermine the “phase 1” trade deal agreed a few months ago.  However, there were some soothing remarks on this front, with a phone call between senior US and Chinese officials last week, highlighting “good progress” on implementing the deal.  Despite such progress, it may not calm tensions over the cause of the virus, especially ahead of US elections in November and markets are likely to remain nervous in the weeks ahead.

This week there will be more evidence on tap to reveal the economic onslaught of the virus, just as many countries are finally flattening the virus curve itself.   Q1 GDP releases will reveal weakness in several countries.  Chinese activity data including retail sales and industrial production as well as credit metrics will give further evidence of the virus impact and how quickly China is recovering.  If anything, China’s recovery path will likely show the pain ahead for many economies that are easing lockdown measures.  In the US, inflation data and retail sales will garner attention.  In terms of central banks attention will be on the Reserve Bank of New Zealand (RBNZ). While no change in policy rates is likely a step up in the RBNZ’s asset purchases may take place.





Euro Resilience To Fade

There will at least be a little more liquidity in FX markets today following yesterday’s public holidays in the US and UK. Whether this means that there will be a break out of recent ranges is another matter. Clearly global growth worries as well as eurozone peripheral debt concerns are having an important impact on market dynamics but are also providing conflicting signals.

On the one hand the USD ought to garner support from Europe’s problems but on the other, safe haven demand and growth concerns is bolstering demand for US Treasuries keeping US bond yields at very low levels despite the lack of progress on increasing the US debt ceiling and agreeing on medium to long term deficit reduction.

In the wake of a run of US data disappointments including April durable goods orders, Q1 GDP and weekly jobless claims last week, fears of a loss of momentum in the US economy have intensified. Manufacturing and consumer confidence surveys in the form of the May Chicago PMI and Conference Board consumer confidence survey today will be closely scrutinised to determine whether the ‘soft patch’ in the US economy will persist.

This will have important implications for the USD as worries about growth may feed into expectations that the Fed’s ultra loose monetary policy will be sustained for longer. As it is US 2-year bond yields have dropped to their lowest level this year.

Fortunately for the USD only USD/JPY and USD/CHF have maintained a statistically strong correlation with bond yield differentials although we expect the break in relationship for other currencies to prove temporary. In the case of USD/JPY, yield differentials have narrowed between the US and Japan, a factor playing for JPY appreciation.

Perhaps the fact that unlike the US Japanese data has on balance been beating expectations notwithstanding disappointing April household spending and industrial output data has helped to narrow the yield gap with the US. One explanation is that that worst fears of post earthquake weakness have not been borne out, suggesting that economic expectations have been overly pessimistic. In any case, USD/JPY 80 is still a major line in the sand for the currency pair.

The EUR continues to show impressive resistance, with EUR/USD breaking technical resistance around 1.4345, which opens up a test of 1.4423. Reports that Greece had failed to meet any of its fiscal targets and of harsh conditions set by European officials for further aid have failed to dent the EUR. Whether the market is simply becoming fatigued or complacent will be important to determine if the EUR can gain further.

A report in the WSJ that Germany is considering dropping its push for early rescheduling of Greek debt has given some support to the EUR too. Ongoing discussions this week are unlikely to prove conclusive however, with attention turning to meetings of European officials on 20th and 24th June. I still believe EUR gains will limited, with the break above 1.4345 likely to prove shortlived.

Some Respite For The Euro

Following several days in which confidence in Greece’s ability to weather the storm was deteriorating, news that Greece asked for EU/IMF help helped to boost global markets and the EUR.  Meanwhile strengthening economic and earnings news helped to provide an undercurrent of support for markets, which boosted the end week rally in risk appetite.  

A 27% jump in US new home sales in March, a firm durable goods orders report as well better than expected earnings, with around 80% of companies reporting first quarter earnings beating expectations, highlight that US economic recovery is becoming increasingly well entrenched.  This is likely to be confirmed by the release of US Q1 GDP this week, set to register over 3% annualised quarterly growth.  

In Europe the picture is far more divergent, with exporting countries such as Germany doing well as evidenced from surveys such as the IFO and ZEW surveys, but in contrast the club med countries are not doing so well.  The highlights of the data calendar this week are April confidence indicators and the flash reading of Eurozone CPI.  Confidence indicators are likely to reveal some improvement, but despite Friday’s EUR/USD bounce, the data will be insufficient to prevent EUR/USD continue to move lower, with 1.3150 still a firm target over coming weeks.  

The official request for aid from Greece from the EU/IMF begins a new chapter in the long running saga for the country.  Greece will officially detail the amount of aid needed in a letter to the European Commission and European Central Bank who will then decide whether to approve it.  

A few dates to note are the maturing of EUR 8.5 billion in bonds on May 19, the completion of discussion with the IMF, EU and ECB on May 6 and state elections in Germany on May 9, which could throw a spanner in any financial support from Germany for Greece.   Meanwhile Greek unions are threatening further strikes to protest against austerity measures that Greece needs to carry out to win any aid package.   

Aside from Greece, attention will continue to be focussed on earnings but the main event of the week will be the Fed FOMC meeting on 27/28 April. Whilst a no change outcome is highly likely, with interest rates set to be left at between 0-0.25%, there will be plenty of attention on whether the Fed removes the comment that policy rates will remain low for an “extended period”. If the comment is removed the statement will be taken in somewhat of a hawkish context, which would boost the USD.

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