The upcoming week could make or break global equities and the demand for safe haven currencies. With the worst of the pandemic now behind Europe and the US also approaching a peak, Wall Street bulls have turned their sights towards when economies will re-open. Another positive for the economy is that confidence has improved the functioning of key funding markets alongside constant bond offerings. Moreover, stocks have recovered with traders’ hopes that things will get back to normal, but importantly, safe havens like the yen and gold are also gaining. This suggests that traders are still playing defence and that the recent stock rebound might be built on shaky ground. Indeed, investors might be downplaying the scale of this crisis, and how long it will take for economies to recover. As such, the upcoming Purchasing Manager’s Index (PMI) will be a reality check.
Investors playing it safe even after pandemic peaks
The dollar may continue to weaken if the spread slows across big cities. It may also weaken if there is further progress with clinical trials that are showing positive results for the treatment of COVID-19 patients. With the entire world delivering massive amounts of QE and fiscal easing, a lot of good news has been priced back into the markets.
Investors have welcomed the slowdown in new infections in Europe and America, which allows for a gradual re-opening of the global economy. Italy and Spain have already started to ease some of their business closures, Germany has announced plans to relax its lockdown next month, and the US president is planning America’s exit strategy.
Henceforth, many investors are adopting the approach that markets will return to normal in a couple of months, setting the stage for a V-shaped recovery. Massive global stimulus measures are of course also feeding these expectations.
While the latest stimulus measures are considered significant enough to slow the economic crisis and stop it from sliding into a full-blown depression, many investors might be underestimating how deep the downside is and how long it will take for economies to recover. The speed of layoffs in the United States is terrifying. The unemployment rate could easily surpass the 10% mark in the coming month. The 10% mark represents the peak of the previous recession.
These loses could take years to recover, especially when considering the psychological scars this pandemic has left on consumer behaviour. Will consumers go to a restaurant for dinner or watch movies in cinema theatres on the day the global lockdowns end, or play it safe and wait? Not to mention a future shutdown due to the risk of second waves of infections once the lockdowns are lifted.
Consequently, a slow and protracted recovery is more likely as consumption could remain soft, something that indices don’t seem to fully reflect. Indeed, the latest gains in safe haven assets such as gold and sentiment towards the Japanese yen market, show little faith in the recent stock rebound. The fact that oil prices can’t stand on their feet, even with the latest supply cuts, argues the same point. The implication is that a real resurgence in demand isn’t expected anytime soon.
Earnings season on the horizon
This will be a huge week for the earnings season. Updates from Intel, IBM, SAP, Netflix and Ericsson highlight the first major round of tech results. If US stocks are going to avoid a return to the March 23rd lows, tech will have to lead the way. Lockheed Martin, Haliburton and Alcoa earnings updates will also be closely watched. With very little COVID-19 economic data to refer to, guidance from corporate executives will be invaluable. While overall earnings and prospects will likely be gloomy, there might also be huge contrasts between sectors. Many industries such as energy and travel will likely be decimated, while home entertainment and online retailers might have made a killing. Although the overall market faces significant downside risks, some companies are rising from the ashes.
US unemployment claims and US PMIs in focus
With an environment as panicky as this one, economic data doesn’t mean that much. Investors already know the global economy is in a recession, and the real questions are how deep it will be and how long it will last. Economic data usually lags readings and are backward-looking on what has happened before, therefore they don’t say much about the future.
Yet there are some numbers that could attract attention: the upcoming April PMI and US unemployment claims. The PMI surveys are released earlier than official data and have a forward-looking component as they ask companies about the orders they’ve received for the following months and their future expectations. On the other hand, US unemployment claims have been a key metric to watch lately, as they are released weekly and provide an up-to-date picture of how quickly jobs are being lost. The US unemployment claims and the flash Markit PMIs for April will be on Thursday.
In the past four weeks alone, 22 million US Citizens have filed for unemployment benefits, amounting to roughly 12% of the entire workforce. While it’s expected that many of these jobs will be filled again once the crisis blows over, many others, especially in the retail sector, will be lost permanently. Without a massive program of job creation by the federal government, for instance on infrastructure, it might take years before the labour market recovers.
Meanwhile in the Eurozone, the preliminary PMIs will also be on Thursday, and while everyone knows they are going to have a negative print; the question is how bad will they be. Note that the euro area had difficulty agreeing on a stimulus package, and with the pandemic destroying consumption and sentiment, it’s likely the PMIs will be scary for the old continent.
As for the euro, it has been affected the most by risk sentiment lately, rising and falling with stock markets. This has a lot to do with the dollar strength, which has been trading like a safe haven in this crisis. Hence, the euro/dollar pair is tending to move in the same direction as stocks nowadays. Since the risk of another decline in stocks appears imminent, this implies that the risks around the pair will be affected, especially considering the EU’s inability to agree on a risk-sharing mechanism like Eurobonds.
While any massive rally in the dollar seems unlikely from here, as the worst may be over, it’s also difficult to envision any major losses. If anything, the outlook looks mildly positive, especially against the euro and commodity-linked currencies, given the prospect of risk appetite souring again.
Risk sentiment to drive cable and commodity currencies
The lockdown has been extended by at least another three weeks, not a surprise given the numbers we’ve been seeing. The number of new cases may be levelling off, but the government won’t be taking any risks having been heavily criticised for their initial response. However, on the economic front, the UK calendar is busy, with employment data for February being released on Tuesday, followed with March CPI numbers on Wednesday. On the next day, both retail sales for March and preliminary PMIs for April are due to be released.
While the PMIs might generate some volatility, the latest correlation between the S&P 500 and the Cable proves to be vital as the main driver for sterling’s risk appetite. This is partly owed to the dollar being a safe haven, but it’s also a testament to how important investor sentiment is for an economy that basically intermediates financial flows, like the UK.
As for ‘commodity dollars,’ New Zealand’s CPI inflation data for Q1 are due on Monday. Then early on Tuesday, the Reserve Bank of Australia will release the minutes of its latest meeting. Later in the day, Canada’s retail sales for March will hit the markets before the nation’s CPI numbers on Wednesday.
Oil prices still near the red zone
The prospect of economies reopening served the black metal positively but the near-term problems aren’t being resolved fast enough for oil prices. The black metal made some small gains but continues to trade close to their lows. The near-term WTI contract is taking a beating though as it approaches expiry, as storage facilities rapidly approach capacity and production isn’t falling fast enough. The inventory data is accelerating higher even as US output declines, now 800,000 barrels a day off its peak a month ago.