Dark moon arising

The tone of markets has appreciably darkened over the weekend as result of several negative news headlines which have cast further doubt on a speedy economic recovery and foreshadowed greater political upheaval.  

According to an article in the FT, white senior citizens - a key demographic responsible for Trumps 2016 election win - are defecting from the Trump camp with increasing speed.  While some agree with the many policies implemented under his tenure, most have criticised his poor handling of the Coronavirus epidemic and the ongoing fallout from the death of George Floyd.  Given how forcefully the President has been lobbying for a reopening of the US, the recent surge in infection rates is also likely to hit him particularly strongly given that demographic’s vulnerability to the virus. 

Another issue that threatens to undermine the President is the escalating trade conflict between his own national security council and the Chinese leadership.  Bloomberg has reported that the two sides have moved beyond trade threats to ‘regulatory punches’.  This aggression suggests that the President has pivoted his strategy away from using the phase-one trade deal to garner election support, towards a more antagonistic trade-war footing.

In the UK, last week’s Brexit optimism has faded and been replaced by a sense of déjà vu.  Michel Barnier, the lead EU negotiator, has been quoted in the newspapers explaining that progress has halted because the UK is not revealing its fiscal subsidy plans. This prevents the two sides coming to an agreement on the EU’s coveted ‘level playing field’.  Last week we appeared to be moving towards a more flexible middle-ground, but this week’s comments suggest that key fundamentals are still missing from the picture.  Our fear is that the EU negotiators allegations that the UK has not divulged its plans might simply mean what it has over the past several years, the UK government doesn’t know what it plans to do either.

Bottom line:  With the UK set to fully reopen this Saturday, we will be watching the UK infection rates to see if they follow the US pattern.  Several US state governors are threatening to re-close sectors of the economy, which is likely to cause a re-evaluation of priorities if the US relapse continues to escalate.

 


The week ahead

GBP

On a trade-weighted basis, the Pound closed last week in the red after climbing 1% during the first half of the week. Further declines for Sterling have kicked off this week, breaking below the index’s mid-May’s support level. This downward move translates to three-month lows against the Euro and another push towards the 1.23 against the US Dollar figure and with quarter-end flows still to be completed, Sterling’s recent decline may not be over. Discussion of temporary tax cuts to stimulate the UK economy might provide a short-term boost for Sterling, but the risk of a deteriorating credit rating could be more damaging. What’s more, Brexit negotiations have yet to show promising signs of a trade deal.

  • Monday’s GfK Consumer Confidence survey is expected to show a slight uptick to -29 for the month of June, continuing the indicator’s rebound.
  • UK Final GDP figures on Tuesday are expected to maintain recent estimates at -2% quarter-on-quarter.
  • Friday hosts Final Services PMI figures for Jun, which are forecast a 47 reading which is still in contractionary territory although a significant improvement from lows seen earlier in the year.

EUR

After the Euro index’s 4% climb from May into June, the common currency has been range-bound for the last few weeks and finished last week only marginally in the green. Concerns over rising COVID cases across the continent could weigh on the Euro in the weeks ahead but a significant counterforce, which prompted the recent rally in the first place, is back in the limelight today with the Macron and Merkel meeting. More details on the EU recovery fund may emerge this week, potentially lifting the Euro back to recent highs.

  • On Monday, Spanish CPI year on year for June came in better than expected at -0.3% versus the forecasted -0.9%.
  • On Tuesday, French Consumer Spending is expected to signal a rebound in June, growing 30% after two double-digit contractions.
  • Tuesday’s Eurozone’s monthly CPI for June is forecasted 0.3% growth from -0.1% previously.
  • Wednesday’s Final Manufacturing PMIs are expected to show contractions across the board except for France. The Eurozone aggregate is expected to read 46.9.
  • On Friday, Services PMIs for June are expected to show contractions across the Eurozone’s largest economies except for France, which is forecasted a 50.3 reading, placing it just in expansionary territory.

USD

Last week, the US Dollar quickly reversed early losses and closed the week unmoved as risk assets continue to slide lower. The trade-weighted index lies just 0.5% below June’s highs and 1% below its 200-daily moving average. Federal Reserve stimulus has been a key driver of asset prices in recent months and could be a topic of discussion again this week as Fed Chair Powell speaks on Tuesday evening along with Treasury Secretary Mnuchin. Furthermore, this week’s quarter-end flows could be a significant driver of USD price action.

  • Tuesday’s CB Consumer Confidence survey is expected to show an uptick from last month’s 86.6 to 90.1.
  • Wednesday’s ADP Non-Farm Employment change is forecast 3 million jobs added to the US labour market after months of heavy job losses.
  • Wednesday’s ISM Manufacturing PMI is expected to have improved to 49.0 in June, from 43.1 in May.
  • Thursday’s Non-Farm employment change mirrors Wednesday’s ADP figure at 3 million new jobs after May’s surprise 2.5 million figure. The unemployment rate is expected to tick lower to 12.5%.


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