Thu, Aug 18, 2022 @ 17:16 GMT
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Weekly Focus – Uncertainty About Policy Support Hits Global Equity Markets

The COVID-19 virus continues to create headwinds for many countries. While the second wave appears to have peaked in hotspots such as the US, European countries are struggling with rising numbers of cases amid the travelling season. In Spain, France and Germany, the numbers of new cases are back at the same levels last seen in April/early May, prompting a tightening of restrictions (e.g. making face masks mandatory), imposing local and targeted lockdowns and postponing further reopening of economies (see COVID-19 Update – Second waves in slow motion, 17 August).

There are signs that concerns about the new flare-up of virus cases and new restrictions are taking a toll on the economic rebound. In Europe, Google mobility numbers have worsened over the past week, although it is still too soon to say that the positive mobility trend has reversed. In Germany, retail trade turnover has fallen 11pp since last week but volatility in the prints can be high, as we have seen in recent weeks. The infection rate in the US seems to have peaked and economic activity is slowly picking up but remains at a very low level (see High Frequency Activity Tracker – Japan riding out second wave as Europe could get shaky, 19 August). When this is said, Pfizer Inc. and BioNTech SE said yesterday that the COVID-19 vaccine they are developing jointly is on track to be submitted for regulatory review as early as October. Next week, the German IFO number (Tuesday) and details of the EU economic sentiment indicator (Friday) are due.

The general risk-on sentiment in markets tempered somewhat this week due to uncertainty about further policy support, especially in the US. Discussion on another US fiscal support package stalled following disagreement between Donald Trump’s administration and the Democrats in Congress. There is speculation that a smaller package of ‘just’ USD500bn will be approved now, leaving the more contentious issues until after the election. The Fed minutes released on Wednesday pointed to considerable concern in the policy committee about the outlook for the US economy in the second half of 2020 but the Fed seems unwilling to strengthen its forward guidance through a new monetary policy framework imminently, as we and the market were hoping for. Fed Chair Jerome Powell’s speech at Jackson Hole on Thursday should give guidance on the form and timing of the new framework.

The review of the phase-1 trade deal between the US and China over the weekend did not take place. Afterwards, President Trump revealed that he personally called off the meeting, raising further concerns about relations between the two countries and the outlook for the trade deal. However, later in the week, China said that such a meeting might soon take place. We see a 50% risk that the phase-1 deal may falter ahead of the US presidential elections.

This week a new round of negotiations between the EU and UK kicked off. The two sides made little progress as we expected. We believe it is too early for a significant breakthrough, as the deadline in early October (or end-December) is not close enough. Our base case is for a deal later in the autumn on a simple free trade agreement (65% chance) but we also see a significant risk of a no-deal Brexit.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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