Recovery Pattern From This Crisis Is Far From Ordinary. What To Watch

The US non-manufacturing ISM report for June (cons: 50.0, prior: 45.4) will likely support the notion that the US economy is rebounding sharply. The extent to which equity and energy markets continue rallying and the US dollar sells off is hugely dependent on how markets react if improving data stabilizes or goes into reverse.
 
Job losses when government-support initiatives end in the coming months, especially in the US and the UK, will challenge the view that monetary policy can bridge the gap towards a recovery for the economy and markets.
 
The pattern of recovery from this crisis is far from ordinary. It's not a bubble pop or bubble reflate recovery cycle. It's an abrupt move switching off of economies, followed suddenly switching them back on. It’s unlikely business nor consumers will react as they have in the past recoveries and the labor market is showing this. On the one hand, some temporarily unemployed people are returning to their jobs far faster than in a normal economic cycle.
 
In contrast, other sectors of the economy were already in decline before the crisis began. Typical big box shops were fighting a losing battle against the rise of online retail; their ultimate demise quickened due to the virus while others threw in the towel accepting the inevitable. But it's these lost jobs that will leave economies with spare capacity and relatively high unemployment at the end of the year. The extent the market can look through this until new start-ups rehire could ultimately be the most significant recovery factor.
 
Asia markets are still waiting for President Trump to sign a bill that would impose sanctions on certain Chinese officials over its national security legislation for Hong Kong. Still, other moves against Beijing are possible before long, according to White House sources.
 
Holding risk sentiment at bay, perhaps only momentarily, the WHO reported a one-day high in global coronavirus infections over the weekend, and Iran and Indonesia reported their deadliest days yet. Mexico reported a daily rise of 523 COVID-19 deaths, bringing the total to 30,366 - fifth highest in the world. Total cases rose by a record of 6,914 to 252,165. India surpassed Russia with the third-highest number of cases globally at 690k. Brazil has over 1.5 mn cases.
 
The EM divergence trade suggests the growing health crises in major emerging markets such as Brazil, India, and Mexico, will hold back recoveries in domestic demand in these economies relative to those that have much more control on the health front and are crucially more levered to the global manufacturing cycle, including China, Korea, and Taiwan.
 
But the head-scratcher is that BRL and MXN were two of the five best-performing currencies over the past week, whereas the rally in INR is partially explainable by huge inflows.