Welcome, June

Three major central banks meet this week, the Reserve Bank of Australia, the Bank of Canada and the European Central Bank. The first two will likely assure investors and businesses that they are prepared to do more if necessary, but are probably not going to take fresh initiatives. On the other hand, the ECB is likely to move. It will have the cover of new staff forecasts and ECB President Lagarde already warned that the more optimistic scenario has been superseded by events and the region’s economy is between the medium and severe scenarios, which mean a contraction of around 10% this year.

With the arrival of June, here’s a rundown of the events and how packed and promising does the data look.

Here are the key-pointers for major economies and markets:

Country

US confrontation with China, job destruction, and the signs of stabilization

1. President Trump seems determined to shift the focus away from his handling of the coronavirus pandemic and positioning for a long battle with China on Hong Kong’s security law, sanctions for treatment on Muslim minorities, living up to their end of the phase-one trade deal, and the yuan’s devaluation. If the US announces fresh tariffs, China will not wait too long to counter, and eventually, a tit-for-tat battle will weigh on risk appetite.
2. The US auto sales and employment data are two data highlights. US auto sales averaged 16.9 mln last year. It was the first year that the average was below 17 mln since 2014. In shelter-in-place halved auto sales, which fell to 8.58 mln in April. The recovery likely began in May with an increase to nearly 11 mln (seasonally-adjusted annual rate). In May 2019, US auto sales were 17.3 mln. The auto sales report will be among the first non-survey reports for May outside of the weekly jobless claims.
3. The US labor market remained distressed in May. The median forecast in the Bloomberg survey calls for an 8 million decline in nonfarm payrolls in May after the 20.5 mln job loss in March. About 5% of the job loss (or 400k) is thought to come from the manufacturing sector. The unemployment rate, derived from a different survey (households rather than establishments) may rise to almost 20% from 14.7% in April. What the April income numbers seem to confirm (+10.5%) is that the government has replaced much of the wage income lost.

UK’s lockdown continues to ease

1. The UK is continuing to ease lockdown restrictions, with non-essential shops due to reopen on 15 June.
2. This will see the country returning to something resembling pre-lockdown, although the hospitality industry remains in limbo.

Europe’s recovery fund plans

1. The European Commission unveiled its recovery fund plans which, alongside the EU budget and the rescue fund, will see €2.4 trillion spent over the next seven-year budget. This will consist of the normal €1.1 trillion budget, €540 billion rescue fund and €750 billion recovery fund. The latter is being proposed to be raised in the markets by the EC – the first time it’s done so for an amount of this size – and backed by all 27 members. What’s more, €500 billion will be offered as grants, with the remaining €250 billion as loans. This is something the “frugal four” – Netherlands, Austria, Denmark, Sweden – are not currently on board with.
2. The ECB meets is all set to meet this week and there are growing expectations for an increase in QE by €500 billion, taking total purchases this year to €1.6 trillion.
3. In Europe, the real and anticipated liquidity not only lifted equity markets but also narrowed the premium southern Europe pays to borrow over Germany. The 10-year Italian premium narrowed by nearly 25 bp last week to less than 190 bp, the lowest since the crisis erupted. It peaked near 280 bp in mid-March. It finished last year near 160 bp. In absolute terms, Italy’s 10-year yield fell for 9 consecutive sessions until the last session, over which time it has fallen from 186 bp to nearly 140 bp.
4. Broadly the same is true for Spain. The premium narrowed by 12 bp over the last week and to slip below 100 bp for the first since early March. It was near 65 bp at the end of 2019. It does not enjoy the same streak as Italy, but in the past two weeks, Spain’s 10-year yield has fallen from 76 bp to almost 56 bp.
5. It is not just geopolitics or Europe’s perennial challenge of joint action that investors are looking past.

Australia under pressure amidst trade tension

1. Tuesday RBA rate announcement expected unchanged.
2. Both the currency and stocks are looking tired after decent rallies.
3. Potential for a downward correction. Escalating trade tensions are very negative for Australian markets and currency.

China’s manufacturing sector returned to expansion zone

1. China’s manufacturing sector returned to expansion zone in May driven by the easing of restrictions related to the coronavirus, or Covid-19, pandemic, survey results from IHS Market showed on Monday.
2. The headline manufacturing Purchasing Managers’ Index rose to 50.7 in May from 49.4 in April.
3. China’s CPC passes security law for Hong Kong. US President to hold a press conference Friday. Escalating protests in Hong Kong. Depending on the US response, we could be back in a trade war scenario. USD/CNY fix at 12 year high Friday, raising prospects of more escalation with the U.S. outright trade hostilities negative for China and regional equities and currencies.
4. China Manufacturing and non-Manufacturing PMI were released. A large miss lower will see Asia as a whole move sharply lower Monday.

No significant data for Japan this week

1. The second extra budget announced totaling $1.1 trillion. The market response is muted although Nikkei continues to power higher on global recovery trade.
2. Equities are vulnerable to a sharp sell-off if US-China tensions escalate. There is no data of significance.

Market

Oil price recovery hindered

1. The oil price recovery has well and truly stalled. The EIA reported another large inventory build on Wednesday. This comes as market sentiment turns south on souring US-China relations. It’s been some recovery for crude prices so a period of profit-taking can only be healthy.
2. With economies gradually reopening, there’s plenty more time for upside, assuming it all goes to plan of course. Huge risks remain but the early signs are encouraging.

Gold’s monumental efforts

1. Gold was up half a percent in early Friday trade, buoyed by a slight softening of the dollar as it continues to bounce off key $1,700 support.
2. Any rally feels like a monumental effort at the moment and even when breakouts occur, there seems plenty of sellers willing to come in and fade the move. We may see more of this in the coming sessions.

Here’s a look at all the important market-moving factors for the week:

Week Ahead

All times listed is EDT

Monday

Germany, Switzerland, and New Zealand markets closed for holidays

3:55: Germany – Manufacturing PMI: likely to be 36.8 from 36.8.

4:30: UK – GDP: expected to edge up to 40.7 from 40.6.

10:00: US – ISM Manufacturing PMI: likely to rise to 43.0 from 41.5.

Tuesday

00:30: Australia – RBA Interest Rate Decision: the central bank down under is expected to hold rates steady at 0.25%.

21:30: Australia – GDP: anticipated to fall to -0.3 from 0.5% QoQ.

Wednesday

3:55: Germany – Unemployment Change: forecast to fall to 195K from 373K.

4:30: UK – Services PMI: expected to edge higher to 28.0 from 27.8.

8:15: US – ADP Nonfarm Employment Change: predicted to fall to -9,000k from -20,236K.

10:00: US – ISM Non-Manufacturing PMI: likely to climb to 44.0 from 41.8.

10:00: Canada – BoC Interest Rate Decision: forecast to remain steady at 0.25%.

10:30: US – Crude Oil Inventories: expected to drop to -1.944M from 7.928M.

21:30: Australia – Retail Sales: seen to plunge to -17.9% from 8.5%.

Thursday

4:30: UK – Construction PMI: anticipated to surge to 30.0 from 8.2.

7:45: Eurozone – ECB Monetary Policy Statement and Interest Rate Decision: rate forecast to remain flat at 0%.

Friday

8:30: US – Nonfarm Payrolls: expected to come in at -8,250K for May from -20,500K in April.

8:30: Canada – Employment Change: likely to have dropped to -500.0K in May from -1,993.98K in April.

 

Based on the above factors and the events lined up for the week, the analyst at RvR Ventures suggests you to Trade responsibly; invest only as much as you can lose. All the profits and losses due to the above data are your own personal responsibility. Kindly practice money management & risk mitigation while trading.

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