During the past week, we witnessed several important economic surprises, including the European Central Bank raising the value of the pandemic purchase program by €600 billion and extending it to June 2021.
US job data last Friday also provided us with a heavy caliber surprise, showing us an unexpected drop in the unemployment rate from the level of 14.7% to 13.3%, after 2,500k Americans got new jobs in the non-farm sectors. Financial markets recovered, stock markets rose strongly, and gold prices fell and the dollar witnessed bearish momentum over the course of the week, but it rose again on Friday.
What surprises lie in store this week as we await a lot of new economic data, and how will it affect the markets?
Over the weekend, OPEC, Russia and their allies agreed on Saturday to extend unprecedented cuts in oil production until the end of July, with producers trying to push prices higher and maintain stable oil prices. However, there are some questions about the production cut approved by Saudi Arabia, the UAE and Kuwait, which amounted to 1.18 million barrels per day. This additional reduction was voluntary, with uncertainty over whether it will continue or whether these countries will return to production according to the agreement in OPEC +.
In energy markets, more surprising data emerged from China, with the General Administration of Customs reporting on Sunday that the largest importer of crude oil in the world bought 47.969 million tons of oil in May, equivalent to 11.296 million barrels per day. With this, imports were 19.2% higher in May than a year ago, hitting an all-time monthly high.
The weekend was not without surprises for traders outside the energy markets, as China announced its trade balance data for May, showing a surplus of $443 billion, a significant difference from the expected trade surplus of $283 billion.
However, the Chinese trade balance reading is not positive, as customs data showed that exports fell 3.3% compared to a year ago, after a sudden increase in April of 3.5%. But imports fell 16.7% compared to a year ago, explaining the high trade surplus, and showing how it conceals significant domestic weakness in China, which significant consequences for the world economy.
China's foreign exchange reserves increased unexpectedly due to changes in asset prices, despite the decline in the yuan due to concerns about a rise in Sino-American tensions. The largest in the world, they increased by $10.233 billion in May to $3.102 trillion, according to data released by the People's Bank of China on Sunday.
On Monday, we await statements from European Central Bank President Christine Lagarde, who will testify in before the European Parliament's Economic and Monetary Affairs Committee. After that, we will wait for any signals from the Central Governorate about the bank’s direction during the coming period, after it recently held the interest rate at 0.00%, leaving the deposit interest in the negative territory at -0.5% and the lending interest at 0.25%.
On Tuesday, we will monitor the meeting of European finance ministers at the ECOFIN meeting, during which stimulus programs for the economy are likely to be discussed in light of the Coronavirus plunging Europe’s economy into its worst recession since the second world war.
On Wednesday, the US Federal Reserve will issue an interest rate decision, in which it is likely to keep the interest rate at its record low level between 0.00% and 0.25%. We will be watching for any developments in the Fed’s expectations for the American economy, especially after the surprise employment data released last Friday. We will also monitor any references to the Fed's asset-purchase and financial and monetary stimulus programs, as well as any mentions of the ‘Repo’ exchange interest markets.
On Thursday, the Eurogroup will meet to discuss measures to stimulate the European economy.
On Friday, it will be Britain’s turn, with GDP data the most significant of several important economic data point due. This should show if the economy did fall into its worst recession in more than 300 years, or if a new surprise emerges as happened in the US.
In conclusion, we are facing a very important week for the financial markets, with expectations for the second half of this year for the global economy likely to be determined. Hopes are currently heading towards a significant economic recovery during the second half, and economists are talking about a ‘V-shaped’ recovery.
However, questions remain about internal and external American political tensions. Traders ignored the recent riots across American cities, but any developments in US-China relations will be carefully monitored.
Gold prices have declined during the past two weeks, with last week gold settling below the $1,700 handle, with traders favoring high-yielding markets after very positive economic data was released from the United States. This week, the downward pressure on gold prices may continue, and we may see prices head towards $1660.00 levels.
If investors’ confidence continues in the markets, or if traders prefer to buy currencies for any reason, then we may see gold prices drop towards $1645.00.
Based on technical analysis, only the return of prices above $1715.00 would restore the possibility of an intraday rise, and unless that happens, we may witness a decline before any new upward wave.
The decision from the Fed this week will be the main driver of gold prices, as they are heavily influenced by the central bank’s decisions.
Oil prices are likely to continue to rise, as OPEC+ agreed to extend its program of production cuts, and the world began to emerge from lockdown. US light oil may stabilize above $40 a barrel, and if successful, we may see a further increase towards levels that may reach $45.
The rise is driven by news from China, as imports of crude oil rose 19.2% in May from a year ago, to reach its highest monthly level ever. Fuel demand has been recovering the easing of restrictions imposed to stop The spread of the new Corona virus.
Over the past three weeks, the US dollar has declined against many currencies, as traders have turned toward higher-yielding assets. This week, volatility and possibly bullish corrections should not be ruled out for the dollar, but as long as traders direct the stock markets towards high yield, any limited rise in the dollar may remain.
On Wednesday, traders will follow the Fed's next move after last week’s fall in unemployment. If the Fed appears more optimistic about the future of the economy, indicating the possibility of reducing stimulus plans, the dollar may rise. But it is more likely that the Fed will continue to stimulate the economy, which may keep the dollar fluctuating within its relatively low levels.
However, if the Fed shows a more negative outlook for the economy, and indicates further stimulus measures, we may see a decline in the US dollar.
Traders' confidence and strong economic growth prospects for the second half of this year are the main catalyst for the rise in US stock indices. Therefore, as long as traders' expectations remain that the global economy will recover during the second half, US stock indices and other stock indices around the world will continue with the overall upward trend.
However, we should know that volatility and possibly some profit-taking from time to time will be linked to the economic data this week, along with the Fed’s decision and meeting minutes on Wednesday.