MACRO MENU: 18 - 22 MAY 2020

MACRO MENU: 18 - 22 MAY 2020

Updated: May 18

MARKET BRIEFING: Monday 18th May 2020
THE WEEK AHEAD: Sunday 17th May 2020

COVID-19 WATCH


We face an interesting period ahead as governments remain under pressure to re-open their economies whilst averting the risk of a significant rise in the reproductive rate of the virus.



This week more US states are set to take their first tentative steps with parts of New York, Virginia and Maryland lifting lockdowns on Friday, and Connecticut and Minnesota are set to ease restrictions in the coming week.



Although the impact of loosening measures will not be immediately known, the market will remain sensitive from a risk perspective to any signs that the process has been mismanaged.


Similar vigilance needs to be kept with tracking numbers in mainland Europe as Italy looks to re-open shops, bars, restaurants and barbers. The government also passed a decree on Saturday lifting all restrictions on internal movement throughout the country.


Meanwhile in Spain, roughly 70% of the country will have entered the first phase of opening while Germany reported the third-lowest increase in new cases since late March on Sunday, a relief for local authorities after a spike of new inflections at the start of last week.



My current view is that the market remains somewhat complacent about the potential size and impact of any significant second wave and the recent increase in tensions between the US and China has only served as a further distraction from the bigger risk still facing global markets right now.



THE TRADE WAR CYCLE


Time to roll out the infamous 'trade war cycle' again as tensions simmer between the US and China once more. The usual tactics from the White House are being deployed with Trade Adviser Peter Navarro suggesting this weekend on ABC that Beijing sent airline passengers to spread the infection worldwide. The comment was somewhat tempered by Trump stating separately that it was unlikely the Chinese deliberately unleashed the pathogen.


Once you cut through the noise the strategy of distraction remains the same and as states across the nation re-open and confirmed cases of COVID-19 inevitably rise, you can expect more finger pointing in the days/weeks ahead.


As what was seen over the previous two years, confrontation can make markets nervous short-term but as the cycle would suggest, when push comes to shove, the necessity of the two nations to coexist remains triumphant, but it is not without its risks. Earlier today the Chinese Commerce Ministry said it is firmly opposed to the latest rules by the United States against Huawei and will take all necessary measures to safeguard Chinese firms' rights and interests.



POLITICAL PRESSURE IS MOUNTING


This time last week UK Prime Minister Boris Johnson delivered a speech to the nation aimed at unveiling the long awaited details on how the UK government intended to approach the phased unwinding of lockdown measures. Fast forward just one week and the latest Opinium/Observer poll showed the approval ratings for the government's handling of the coronavirus situation has dropped by 9 percentage points with the net approval rating negative for the first time since the outbreak began.


Further pressure will be knocking on the door at No. 10 this week as the latest UK economic data is likely to show more emphatic evidence of the severe impact the lockdown has had on the British economy. Although the plunge in retail sales and sharp drop in inflation for the month of April is largely priced in, the reality of shops not opening fully until June, continued social distancing, and a cautious consumer from both a financial and health perspective, the outlook looks bleak for high street retailers.


IS THE MARKET COMPLACENT OVER BREXIT?


Given the magnitude of the pandemic, the topic of Brexit reared its head last week as the penultimate round of talks ended with the UK government stating "very little progress" has been made. Although the negotiation sounds like a broken record we are but a few weeks away from an important milestone that could result in the prospect of no-deal being placed firmly back on the table.


Analysts at ING note that GBP downside seems heavily under-priced and while I feel that an extension is most likely, the Dutch bank now sees the non-extension scenario as an above 50% probability event. Either way, the lack of implied volatility and market positioning at present means that more movement will likely be seen as we close in on the end of June deadline.


NEGATIVE INTEREST RATES


Over the weekend the negative rate debate raged on with Bank of England Chief Economist Andy Haldane stoking the fire suggesting the Bank is examining unconventional monetary policy measures more urgently amid the economic slump caused by the coronavirus pandemic. Although the press wires have specifically isolated his comments on negative rates, I do feel they have been taken a little out of context as he did go on to state that the Bank is reviewing a number of policies - including negative interest rates and expanding the scope of the bank’s asset-purchase plan to include riskier securities.


Nonetheless it appears that despite all their efforts last week central banks can't escape the pressure to do more, with the Fed Chair Jerome Powell appearing on CBS' 60 Minutes today. Powell stated that “assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year", but that the "recovery may stretch deep into next year and a full comeback may depend on a coronavirus vaccine".



As a reminder, Powell will remain in the spotlight this week as he appears before the Senate Banking Committee on Tuesday.


My colleague Eddie posted a great video this weekend (HERE) where he breaks down the negative interest rate basics, the concept of them going negative, what that means for you and the economy and how banks are starting to hedge volatility.


More on the above in my regular market briefing available on the Amplify Trading YouTube channel.


Anthony Cheung

Head of Market Analysis

(@AWMCheung)


WEEKLY TRADING SET-UPS FROM SAM NORTH

Senior trader and mentor Sam North provides a technical look at the charts and his set-ups for the week ahead.



CALENDAR HIGHLIGHTS

Monday: JN GDP (P), Tertiary Industry Activity Index, CN House Prices, EU ECB Weekly APP Update, UK Rightmove House Price Index, US NAHB Housing Market Index, Fed's Bostic, ECB's de Cos, BoE's Tenreyro Speaks


Tuesday: AU RBA Minutes, Home Loans, JN Industrial Production (F), Capacity Utilisation, SP Trade Balance, GE ZEW Economic Sentiment, EU Finance Ministers Meeting, Construction Output, US Housing Starts, Building Permits, Weekly API Inventories, NZ GDT Price Index, Fed's Powell Testifying Senate Banking Committee on 'Coronavirus Aid, Relief & Economic Security Act', Fed's Rosengren, ECB's Lane Speak, US Earnings: Walmart, Home Depot, Expiry of June WTI Futures Contract


Wednesday: AU MI Leading Index, JN Reuters Tankan Index, Core Machinery Orders, FR 3/5-yr Auction, GE PPI, 10-yr Auction, EU CPI (F), Current Account, Consumer Confidence, US Weekly Inventories, FOMC Minutes, 20-yr Auction, CA CPI, Wholesale Sales, BoE's Bailey, Broadbent, Cunliffe, US Earnings: Target

Thursday: AU/JN Manufacturing/Services PMI, JN Trade Balance, SP 3/5/10-yr Auctions, UK Manufacturing/Services PMI (P), 10-yr Auction, CBI Industrial Trends Orders, US Weekly Jobless Claims, Philly Fed Manufacturing Index, Manufacturing/Services PMI, Existing Home Sales, Leading Index, 10-yr TIPS auction, CA ADP Employment Change, New Housing Price Index, NZ Retail Sales, Fed's Williams, Clarida, Powell, ECB's Panetta, BoC's Poloz Speak


Friday: JN CPI, FR/GE/EU Manufacturing/Services PMI, UK Retail Sales, PSNB, CA Retail Sales, ECB's Lane Speaks


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