The Big Week

There is a definite risk-off tone to Asia’s financial markets this morning as the week gets underway. Weekend headlines were dominated by fears of secondary outbreaks of COVID-19, especially in Beijing; where part of the city has been locked down to contain a localized outbreak. South Korea and Japan are ready to play whack-a-mole controlling their own outbreaks, highlighting what a persistent little beast COVID-19 really is.

However, this week comes off as an important one, as if unveils a lot of important data that shapes the picture of macro economy.

Below are thumbnail sketches of the events and data that shape the macro picture.

Country

US Data

1. The US dollar recovers this morning with commodity currencies under pressure
2. With risk aversion rising again this morning, the US dollar has staged a broad recovery this morning. Although the Dollar Index of major currencies is down only 0.20% to 97.12, the hammer has fallen hardest on commodity currencies.
3. While a second wave of the virus cannot be ruled out by any means, it does look like the US economy has begun the long process of recovering from a steep contraction. There will be more evidence as the US reports May retail sales and industrial output figures. Retail sales fell 16.4% in April and may have risen by 7.5%-8.0% in May. Investors already learned that auto sales rose more than economists expected (12.2 mln saar from about 8.6 mln in April and median forecast in the Bloomberg survey for 11.1 mln).
4. Industrial production is expected to rise 2.5%-3.0% after the 11.2% drop in April. Separately, May housing starts and permits are likely to jump after three months of declines. The Empire State and Philadelphia Fed surveys start the cycle of high-frequency June data. Both surveys are expected to show improvement for the second consecutive month.

 

Bank of England

1. The UK experienced its sharpest contraction on record in April, the first full month of the lockdown. The economy contracted by 20.4% at the start of the second quarter which is expected to be the worst month of the three.
2. The Bank of England is expected to increase its bond-buying in response to the pandemic, with £100-200 billion added to its quantitative easing program. This comes as government borrowing spikes to fund the crisis which would have otherwise risked pushing up borrowing costs.

Brexit

1. High-level talks between Boris Johnson and Ursula Von Der Leyen are expected to take place as the two sides look to reconcile the significant differences ahead of the 31 December transition expiry.
2. As it stands, no deal is the default and the UK is expected to formally rule out an extension once again. We’ve seen this all before though and compromise tends to come late in the day. Still, business could very much do without this in a pandemic year.

EU Summit

1. The European Council (heads of state) hold a virtual meeting on June 18 to ostensibly discuss the EU’s May 27 Recovery Fund proposal.
2. Some have heralded the proposal as a key turning point in the evolution of Europe, and the possibility of a so-called Hamiltonian moment, a major set toward fiscal union, has been suggested. We have been less sanguine; recognizing the potential scaffolding for a greater union, but also that projecting emergency actions into the future is fraught with danger.

ECB’s TLTRO

1. The ECB will offer the most attractive terms to date on its Targeted Long Term Refinancing Operation. These three-year loans will be available at minus 100 bp if certain relatively easy lending targets are met.
2. There will be huge participation as banks roll some of their past borrowings into this facility with such attractive terms. Under such programs, the ECB has loaned around 1.02 trillion euros.

EM Central Banks

1. At least six emerging market central banks will meet. In the Asia Pacific region, Indonesia and Taiwan central banks meet. Indonesia has scope to cut at least 50 bp in its 4.5% key seven-day reverse repo rate.
2. The rupiah is the strongest emerging market currency here in Q2, appreciating by about 16.7% after falling 15% in Q1. Taiwan has deflation in the headline CPI and the core is just above zero. Its benchmark interest rate is at 1.125%.

Norges Bank

1. Norway’s central bank will likely shrug off the firm May CPI readings when it meets on June 18 and stand pat. Headline inflation rose to 1.3% from 0.8% in April.
2. The core rate, which excludes energy and adjusts for tax changes rose to 3%, the most since September-October 2016.

Australian Data

1. Australian stocks and Australian dollar sold heavily on equity correction into the week’s end. Negative results on Friday for Wall Street should see that trend continue into the first part of the week.
2. Australian markets are among the most vulnerable to deep bull market correction. RBA minutes will be released Tuesday.
3. Unemployment released Thursday (6.9% E) will drive intraday volatility. Otherwise, what happens in the US will drive sentiment.

Bank of Japan

1. The BOJ policy meeting is set for Tuesday. Unchanged at -0.10% but looking out for more stimulus measures. Stocks remain positive.
2. Tankan and Trade Balance are released Wednesday, but are unlikely to impact markets. Markets will be led by Wall Street after sell-offs this week.

China Industrial Production (4.5%E) and Retail Sales

1. The poor number could see Asian markets weaken depending on Wall Street’s Friday performance. Ongoing tensions with the US over HK, trade and COVID-19.

Market

Oil prices sink in early Asia on COVID-19 concerns

1. Oil prices climbed very modestly on Friday in sympathy with equities but have sunk rapidly this morning as secondary outbreak COVID-19 concerns sweep the markets. In particular, the partial lockdown in Beijing has spooked financial markets.
2. Brent crude has plunged by 3.0% to $38.00 a barrel, and WTI is 3.20% lower to $35.20 a barrel in volatile trading. One ray of light is that both contracts have partially recovered some initial losses, suggesting that bargain hunters are active amongst Asia’s physical buyers.
3. Brent crude is flirting with its 100-DMA at $38.40 a barrel, as it has for the past three sessions. Its inability to pull away from that event horizon, and recover its footing above $40.00 a barrel, suggests that further losses are likely. Below the 100-DMA, the next support if at $37.00 a barrel. Should that capitulate, a fall as far as $33.50 a barrel cannot be ruled out.

Gold and the US data

Gold has been range-bound for the last couple of months since it first tried to break $1,750 only to quickly run out of steam. It’s tried again a few times since, each as unsuccessful as the last, and it looks to be suffering the same fate again this time.

It’s pushing a little higher again as it looks to capitalize on dollar weakness but we could see it run into difficulties once again unless the greenback continues its journey south.

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

Week Ahead

All times listed are EDT

Monday

8:30: US – NY Empire State Manufacturing Index: anticipated to have moved higher in June, to -27.50 from -48.50 previously.

21:30: Australia – RBA Meeting Minutes

Tuesday

2:00: UK – Claimant Count Change: forecast to tumble to 370.0K from 856.6.

5:00: Germany – ZEW Economic Sentiment: seen to have risen 60.0 from 51.0.

8:30: US – Core Retail Sales: probably recovered to 5.1% from -17.2% in April.

Wednesday

2:00: UK – CPI: predicted to retreat to 0.5% from 0.8% YoY.

5:00: Eurozone – CPI: likely to have remained flat at 0.1%.

8:30: US – Building Permits: expected to have climbed to 1.248M from 1.066M.

8:30: Canada – Core CPI: likely to have risen to 0.1% from -0.4% previously.

10:30: US – Crude Oil Inventories: forecast to plummet to -1.738M from a lofty 5.720M.

Thursday

7:00: UK – BoE Interest Rate Decision: anticipated to remain at 0.10%.

8:30: US – Initial Jobless Claims: expected to come in at 1,300K after last week’s 1,542K.

8:30: US – Philadelphia Fed Manufacturing Index: likely to have surged to -25.0 from -43.1.

Friday

2:00: UK – Retail Sales: seen to jump to 5.8% from -18.1%.

6:30: Russia – Interest Rate Decision: expected to be cut to 5.00% from 5.5%.

8:30: Canada – Core Retail Sales: probably fell to -12.8% from -0.4%.

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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