It’s sometimes easy to forget just how unusual these markets are that we’re witnessing on a daily basis. They’re contending with economies around the world that only two months ago were in the best shape they’ve been in for years, a global pandemic that’s wreaked havoc across the globe, unprecedented fiscal and monetary stimulus and an enormous amount of uncertainty to cap it off, leading many companies to not even bother offering guidance as they simply don’t know.
When you weigh all of that up, it’s hardly surprising the levels of volatility we’re seeing on a daily basis. Last year we thought a trade war between the US and China and no-deal Brexit could destabilize the global economy. Now we could be headed for both on top of everything else (granted, we’re far from that situation at the moment, but still).
This week was eventful. Next week, all we have to contend with is the US jobs report (and jobless claims figures with April’s total above 30, yes thirty, million), Bank of England and Reserve Bank of Australia decisions and another busy earnings week. Oh, and the oil crisis. Almost forgot about that one. No big deal.
The coronavirus pandemic has now killed more than 64,000 Americans and 234,000 people worldwide. Wall Street is paying close attention to the slow reopening of the economy across 20 states. Economic activity will need to see a successful reopening of the economy before investors feel confident that we are on the other side of the virus. The risks at opening now for some states is that a new wave of new cases could happen. Not every state is adhering to the guidelines set for reopening, so investors will closely watch to see if any spikes occur with new cases over the next couple of weeks.
The Fed has been very active in delivering stimulus and now they need to unveil the details to the rest of the emergency programs. A more calculated approach seems to be working for the Fed, case in point with the details with the Main Street Lending Program. The Fed will remain accommodative for the foreseeable future and will be quick to intensify their efforts if the recovery is threatened.
The Presidential election is six months away and former VP Joe Biden needs to pick who will be his running mate. Biden has promised his VP selection would be a woman, but it should not be ruled out that he might have to cave on the idea and go with Governor Cuomo. The New York Governor handling of the handling of coronavirus has made him a favorite among many on the East Coast, but his likeability is questionable for the Midwest. Biden will turn 78 a few weeks after the election, so his VP selection will be critical for many voters.
Boris Johnson announced on Thursday that the country is finally past the peak of coronavirus which, in theory, means it can start preparing for lockdown measures to be lifted. This won’t be done quickly or without certain conditions being met, the five tests laid out by the PM. But it does provide hope that some businesses can reopen their doors and people return to work.
The Bank of England meets next week and has already eased monetary policy considerably in line with others around the globe. No significant measures are currently expected, although as we’ve seen, central banks are continually tweaking programs to respond to the evolving needs of their countries.
NB The BoE has changed the time of the release to 7am next Thursday from the usual midday. While there haven’t been expectations of a change, the last time they announced measures on budget day, they also released this at 7am. More speculation likely over the coming days.
It’s been some week for the eurozone’s third largest economy. Fitch downgraded its credit rating to one level above junk, leaving it teetering on the edge with all three major credit rate agencies. It entered technical recession after contracting 4.7% in the first quarter, having shrunk 0.3% in Q4. And its government forecast the country will shrink by 8% this year, with some thinking that’s optimistic, likely putting further pressure on its ratings and debt later this year.
The flip side is that new coronavirus numbers continue to decline, as do the number of deaths, which will allow for a gradual reopening of the economy. This may not save it later this year but the ECB stands ready to support those fallen angels among it, being debt that’s fallen into junk territory as a result of the crisis. It’s already agreed to accept these bonds as collateral in its credit facilities, rumours suggest they’ll eventually apply the same logic to bond buying should Italian debt become junk.
Spain is preparing to ease lockdown measures, starting with four islands from Monday, following a full month of declining cases and deaths. Spain’s measures have been among the most stringent and the process will likely be done very slowly. The country contracted by 5.2% in the first quarter and will fall into recession in the current one. The Bank of Spain expects a full year contraction of 9.2% and unemployment to peak at 19% this year.
On the day when Italy and France officially fell into recession, with sharp contractions in the first quarter, the ECB expanded its easing programs in an attempt to further alleviate pressure on the region in these tough times. The central bank reduced interest rates on its TLTRO III program and introduced new non-targeted pendemic emergency LTROs (PELTROs) in a bid to further support liquidity conditions.
There was no increase in the PEPP or the addition of “fallen angels” in the purchases yet but that must just be a matter of time. It could be a few months before the latter becomes compulsory so there was no urgency today, with Italy holding onto its investment grade earlier this week.
The economic data this week from China has been encouraging for the rest of the world as it emerges from lockdown. What is less encouraging is what’s coming from the White House with Donald Trump insistent on ensuring that the finger of blame for the coronavirus toll in the US is not pointed his way. Trump has threatened tariffs on China once again and the trade deal which took so long to thrash out may already be at risk. The coronavirus has already likely meant that the terms are not being met and Trump may feel the need to make China a key feature of his re-election campaign. Expect more hostility in the weeks and months ahead.
RBA meeting on Tuesday, no change in interest rates expected. Traders are likely to look for more insight on bond buying, with the central bank expected to continue to taper having achieved its goal of managing the yield curve through this extraordinary time. It wanted to keep the 3 year rate around 0.25% which it has successfully managed to do.
BoJ removed the ¥80 trillion ceiling on annual purchases at its meeting earlier this week, making the announcement a day earlier than planned, and joined the QEinfinity club. The central bank no longer expects to hit its inflation target in the next three years and pledged to do more when needed.
Oil prices have staged an impressive rebound this week after a rocky start, as the USO – America’s largest oil ETF – opted to avoid another May contract scenario and shed its June holdings. This represented around 20% of its $3.6 billion portfolio so traders were naturally keen to get out the way and compress prices to very generous levels, if you’re a buyer. The price rebounded shortly after but still trades below $20.
The production cuts are finally kicking in with Saudi Arabia reportedly implementing agreed reductions ahead of schedule, the OPEC+ deal officially underway as of today, Norway announcing a reduction of 250,000 barrels per day and ConocoPhillips culling 265,000 this month, rising to 460,000 next. Others will likely follow, at which point we may see downside pressures ease on oil prices and near contracts. Prices are still extremely low though and the next two weeks will likely see extreme volatility return.
It’s been a strange week again for gold. It remains broadly aligned with risk assets but not necessarily reliably so at this point and even its relationship with the dollar has become a little sketchy. It seems after a period of turbo-charged volatility, the yellow metal has settled into a consolidation phase, with $1,660 providing the floor and $1,750 the ceiling. Quite a broad range, granted, but given the environment, something has to give. Either the world’s going to become a more predictable and relaxed environment, or this can’t last.
The bitcoin halving event is nearing and it seems the extra publicity the crypto space is getting as a result is having the usual effect. Bitcoin dragged its feet through $7,500 resistance but once $8,000 fell it took off. The cryptocurrency fell short of $10,000 psychological resistance to trade just below $9,000 at the time of writing. The halving itself isn’t a bullish event – something that seems to have broad agreement which is strange to see, normally everything is bullish for some reason – but publicity often is so the coming weeks may generate interest and support cryptos. Whether it can be sustained after that I’m very sceptical.