Post date: 14/04/2020 09:10

Financial markets worldwide continued to look past the grim economic news and focus instead on the massive state and central bank interventions that are announced on a weekly basis. Stock markets and risk assets in general continued to rebound last week, as the Federal Reserve announced yet another batch of direct loans to support the economy, the Eurogroup launched another somewhat more modest fiscal stimulus package to be added to the oneness at the national level. Unlike risk assets, G10 currency markets did not quite know what to make of the news, and most currencies ended the week where they had begun. Emerging market and G10 commodity currencies, however, joined risk assets worldwide and rallied strongly. The best performers were usually oil currencies, buoyed by the prospects of an agreement to cut production and the consequent rebound in oil prices.

Next week, the focus will be twofold. On the one hand, traders will be focused on the pace of decline of new Coronavirus infections in Europe, the gradual economic recovery in China, and confirmation that US cases are peaking. On the other, high frequency economic measures like weekly jobless claims and monthly retail sales in the US will be scrutinize closely in order to assess the extent of the damage wreaked by the pandemic.


In the absence of major timely data releases, the key to Sterling performance next week will be the Government announcement decision on the duration of the lockdown beyond April 29th, expected this week. We expect that the lockdown will be extended, although this is probably already priced in by markets, and hence Sterling will probably track the Euro’s moves against the dollar fairly closely next week.


The Eurozone added an international fiscal rescue package roughly 4% of the combined Eurozone GDP to the battery of measures intended to mitigate the economic impact of the pandemic. While this figure is more modest than those being considered in the US, it must be remembered that it is in addition to more substantial stimulus measures being undertaken by the individual states with the explicit support of the ECB. By contrast, US individual states are unable to provide much fiscal stimulus of their own and must rely almost exclusively on Federal programs. We remain impressed by the scale and speed of the Eurozone overall response, and think that sooner or later this will filter through to a higher Euro.


The Federal Reserve launched yet another massive loan program to support the economy. The new package includes loans to local and state governments, a critical piece of the support puzzle given the downturn in tax revenues and their inability to run deficits on their own. However, the most timely indicator of the damage wrought by the crisis, weekly jobless claims figures, continues to blow out even pessimistic expectations. While the fiscal and monetary response in the US is commensurate to the size of the problem, we still expect the US contraction to be deeper and longer than in Europe, and maintain our positive view of the Euro.