Post date: 29/06/2020 08:55
Last week was a very mixed one for global financial markets. The continued uptick in contagion numbers in the US, where some states are actually recording record levels of new cases, meant that stock markets worldwide wobbled, although there is so far no sustained downward trend. The fact that US deaths are relatively stable even as new cases grow is for now keeping a floor under risk assets worldwide. Currency markets also had an uneven performance. G10 currencies all traded in tight ranges, Latin American ones generally fell while Asian ones generally rose. All in all, it was hard to tease out a common theme.
Next week the focus is again on the US labor market and the speed at which it recovers from the worst of the crisis. In addition to the weekly jobless data, the payroll report for the month of June will be key. Quarter-end rebalancing flows in asset managers will add volatility going into Tuesday evening.
June PMI indices of business activity rebounded more than expected, as they did in most countries. The composite number at 47.6 indicates that the economy is close to expanding again and that the second quarter of 2020 will probably mark the trough in economic activity. The deadline for a Brexit extension is on Tuesday, but the British government has already indicated that it will not seek one, and we do not expect much volatility beyond the usual quarter end rebalancing flows. Both sides have been making cautiously optimistic noises, so we expect Sterling to resume its rebound over the coming weeks.
The Eurozone PMIs bounced to similar levels as those in the UK in June. Other than that, the common currency benefited from the increased focus in the divergence of the epidemic path across the Atlantic, as European cases clearly trend down while US cases increase. Nevertheless, general nervousness and the uncertainty over quarter-end portfolio flows meant that in the end the Euro ended the week just about where it started it against the US dollar. Now that the risk of the Euro crisis has been pushed out of trader's radar screens, we expect the Euro to resume a slow grind higher against most world currencies.
One of the largest sources of uncertainty in currency markets going into the second half of 202 is whether the US dollar will retain its status as a safe haven as the pandemic conditions deteriorate there relative to most other developed countries. Last week, new cases surged to a fresh records, although deaths thankfully lag, a sign that the latter is at least partially due to more testing. Nevertheless, as states pause or roll back their reopening schedules, the damage inflicted on the labor market will take longer to heal. So far, the unusually generous state response (stimulus and expanded unemployment benefits) has succeeded in preventing a collapse in workers incomes, but with the extra weekly $600 benefits set to expire at the end of July, much depends on an agreement between the parties to prolong the special measures. The June payroll report on Friday should reflect continued modest improvement in unemployment and job numbers from the dismal troughs of April, but given the unusual level of uncertainty it is likely that the more timely weekly jobless claims will give at least as much useful information as the actual payroll report.