Finding a groove

This week has begun on a calmer footing as markets acclimate to recession predictions, abysmal economic readings and tales of government policy bungling.  All told the viral crisis has already resulted in an exponential decline in prices; what we are seeing now is a revision of the first dire calls and return towards more moderate levels.  The action isn’t over, it is simply shifting towards a focus on surviving the interim period.

On Monday of last week, the S&P 500 index bounced off 2016 levels around 2200 and rallied nearly 15% by the end of the week.  In today’s open, the S&P trading seems to have flattened out mirrored by flat S&P futures prices suggesting most of last week’s run is over.  Even European equities, which were so heavily sold two weeks ago, have since retraced throughout last week, albeit to a lesser extent then their US counterparts.  On the face of it, this seems like a positive signal but that might be a premature conclusion.

Over the weekend, optimistic Donald Trump abandoned his view that business would return to normality by Easter and instead expressed a more tenuous hope that we hit a bottom by June.   It was inevitable given the pace of events and strengthening of quarantine measures across the globe, but it has reframed market focus on continued business solvency. In the coming month, the expectation is for short-term corporate borrowing to increase dramatically, along with a commensurate jump in bank funding for SMEs. This will test how well-calibrated government assistance is to the evolving crisis. 

Bottom Line:  Assets have seemingly bottomed, but the nature of the crisis continues to evolve.  This requires continued focus on the risks affecting business, so that our thus-far stabilised 'patient' doesn’t expire of complications.  Not surprisingly macro-economic data has been ignored because it isn’t relevant to the fast-moving crisis.  Last week’s equity appreciation should also be viewed as bounce from the bottom, rather than true buying signal, largely because there is still a long way to go and many chances to fail before the end is in sight.


The week ahead

GBP

Last week proved to be volatile for Sterling, causing its trade-weighted index to climb almost 6.5% from lows reached in Monday’s session. The Pound dipped below 1.15 against the US Dollar on Monday, but gained significantly throughout the week, reaching highs of 1.2486 against the Dollar and 1.1228 against the Euro on Friday evening. Chancellor Sunak announced new measures of fiscal stimulus for the economy which is now in limbo following Boris Johnson’s announcement of full lockdown on Monday evening. Market volatility should still be expected this week, despite a light economic calendar for the UK.

  • On Monday, mortgage approvals are forecast to read 68k which is largely in line with readings over the last few years. However, future readings are likely to be poor since home buyers and sellers have now been encouraged to suspend transactions.

  • GfK Consumer Confidence is forecast to show a decline in the measure to -14 from -7 in Feb

  • Final GDP for Q4 2019 is expected to show a stagnant economy with 0% growth on Tuesday.

USD

On a trade weighted basis, the US Dollar sank 4.5% throughout the week following attempts from the Fed to boost Dollar liquidity. What’s more, capital flows back into riskier assets caused the Dollar to drop off throughout the week. However, according to the VIX Index, market volatility remains at highs not seen since 2008, so a reversal of last week’s trend is still very possible.

  • Tuesday afternoon hosts Chicago PMIs as well as the CB Consumer Confidence survey. Chicago PMI’s are expected to show contraction at 44.1, down from 49. CB Consumer Confidence is expected to take a hit as well, reading 115.1 down from 130.7 previously.

  • Wednesday’s ADP Non-Farm employment change is forecast -125k, down from 183k last month. This precedes Friday’s Non-Farm payroll figure which tends to provide greater market volatility.

  • Also on Wednesday is ISM Manufacturing PMI which is expected to show contraction in the sector at 46. This is down from last month’s expansion of 50.1.

  • Thursday’s Unemployment Claims may add to last week’s unprecedented reading of over 3 million people unemployed. The forecast is another 3.15 million Americans unemployed.

  • Friday will host Non-Farm payrolls which is forecast for a change of -81k, while monthly average hourly earnings is expected to read 0.2% growth, down from 0.3% last month. Following this, ISM Non-Manufacturing PMI is expected to show contraction in the sector at 48.

EUR

The trade-weighted Euro index closed in the green last week, climbing almost 2% from Monday lows. This move, in conjunction with US Dollar weakness, accelerated the Euro to highs to 1.1142 against the Dollar. However, Sterling outperforming the Euro pushed the GBPEUR cross higher throughout the week, trading at 1.1228 on Friday evening. This week, leading economic indicators are expected to extend last week’s poor PMI readings, providing insight into the size of the economic downturn in the Euro area as a result of full lockdown in its major economies.

  • On Tuesday, Eurozone year on year flash CPI, including the separate core reading which excludes volatile goods, is expected to show 0.8% price growth while the core reading forecast for 1.1% price growth. The expected drop in inflation places the measure further away from the European Central Bank’s desired level of below but close to 2% inflation.

  • Wednesday will host several Final Manufacturing PMI readings for March, with the Eurozone aggregate forecast to show a contractionary level of 44.7, down from 44.8 in February.

  • Eurozone unemployment is also released on Wednesday. The monthly release is forecast to be unchanged at 7.4%, but the risk of a downside deviation seems much greater than to the upside.

  • On Friday, the final reading of Services PMI’s, which showed record levels of contraction last week, is expected to consolidate previous estimates. The Eurozone aggregate is forecast to read even lower than last week at 28.2, down from 28.4. Monthly retail sales are also forecast for a downturn from the last reading – expectations are a modest 0.1% growth.