Following a strong rally in stock markets since late March, sentiment became a bit more hesitant this week. US-China tensions came back to the fore after US President Donald Trump said he was confident the new coronavirus came from a Chinese lab in Wuhan and his Secretary of State said there was ‘enormous evidence’ of this. Threats of new tariffs on China as punishment created anxiety in the markets. The tensions eased a bit during the week though and so far there is no evidence presented of the claims. Trump’s own intelligence community has stated it concurs with ‘the wide scientific consensus that the COVID-19 virus was not man-made’. However, the intelligence office will continue to investigate if it could be the result of an accident at the lab. The EU has joined other countries in asking for an investigation into the origin of the virus and the response.
When it comes to the development in the COVID-19 outbreak, it has been a bit of a mixed bag this week. On the positive side, Europe continues to see a steady improvement, with a decline in new deaths to around 30% of the peak level. However, in the US, the number of new infections is coming down very slowly and outside New York it is actually increasing. This is a big concern, as many US states have embarked on a reopening of the economies, posing a clear risk of a renewed increase in new infections soon. It is also at odds with the White House guidelines that states should see a decline in new cases for 14 days before starting phase one of reopening. Before long, the US could face a tough choice between a pickup in the death toll versus delaying a further reopening of the economy.
That the global economy took a further big dive in April was confirmed in the global PMI data , which plunged to 39.8 from 47.3 in March. US ADP employment numbers showed a decline of 20.2 million people in April, a new record decline. Finally, German factory orders were 16% lower in March than in the same month in 2019. The short-term headwinds are significant but we still look for a gradual recovery over the coming six months as economies reopen. It is a very fragile recovery though and the risk of second and third waves will continue to linger, leaving uncertainty high. A ruling by the German Constitutional Court threw doubt over the future ammunition of the ECB’s asset purchases. The court ordered the German government and parliament to ensure the ECB carries out a ‘proportionality assessment’ of its significant government bond purchases. The ruling had limited market impact and, in our view, it is likely the ECB can justify its asset purchases based on its mandate to achieve inflation of close to 2%.
US bond yields faced upward pressure this week, following announcements of significant issuance of debt. The 10-year government bond yield rose from 0.62% to 0.72%. On Monday, the US Treasury revealed it will borrow USD2.99trn in Q2, a new record of 1.5% of GDP in only one quarter. The previous record was USD569bn in 2008. EUR/USD continued to move in a range of 1.08 to 1.10 this week, while oil prices moved a bit higher from USD26 per barrel (brent) to slightly above USD30 per barrel.
Next week the EU Commission could come with its proposal on the design and size of the Recovery Fund. Otherwise, focus is set to be on further reopening of economies, the development in virus numbers, US retail sales and Chinese data on industrial production and retail sales.
