Post date: 15/06/2020 09:23
Last week was almost a mirror image of the one before. Equities sold off worldwide while government bonds and safe havens bounced back. Interestingly, peripheral bonds in the Eurozone managed to end the week nearly unchanged, in spite of the general wave of risk aversion, in a sign that the massive ECB response to the crisis is working. This price action also lent support to the Euro, which finished the week down only slightly. In G10 we must mention the enormous volatility in Norwegian Krone trading, which overreacts to moves in both directions on thin liquidity. Emerging market currencies generally sold off, with Latin American ones the worst losers and Pacific Rim managing to close the week nearly unchanged.
Next week is relatively quiet in terms of data releases. The Bank of England meets Thursday. We will also be paying close attention to the new virus cases in the US where certain states like California, Texas and Florida have shown an unsettling pattern towards caseload increases rather than decreases.
April GDP numbers painted a truly dismal picture of the state of the economy at the worst of the lockdown. The economy contracted by an unprecedented 20.4% for the month, with falls in manufacturing and construction of over 40%. Markets look through this somewhat outdated data to the more recent hopeful signs on the economy, and Sterling held up fairly well in a week of risk asset sell offs. This will be a busy week for the Pound, with a top level meeting between Johnson and the EU on Brexit followed by the Bank of England meeting on Thursday. We expect little action from the latter, but any dovish rhetoric regarding the possibility of negative rates could weigh on the Pound.
Last week was a quiet one for European data, and this one will not be very different. Inflation data on Wednesday should provide insight into the relative damage wreaked by the lockdown on the supply and the demand sides of the economy. Beyond that and the potential for progress in the Brexit talk early in the week, we expect the common currency to mostly trade off events elsewhere.
Federal Reserve messaging at the June meeting last week was decidedly dovish, with an emphasis on reassuring markets that rates will not go up for years and that the Fed is committed to a policy of extreme monetary easing. This message, together with worrisome signs of an increase in the pace of infection in certain US states meant that the dollar did not benefit as much from its safe haven status when the equity market sell off began Wednesday night. This week, retail sales and industrial production data for May should give a clearer picture of the extent of the bounce back in May. As always, the most timely data point during this crisis will come Thursday, when the weekly jobless and continuing claim data are published.