The New Normal
Another crazy week comes and goes and the thing that has really stuck with me is how normal the extraordinary suddenly seems. On Thursday, the Dow fell almost 7% and, sure, it was newsworthy but it wasn’t shocking. This is the 22nd biggest ever drop in the index – going back more than 100 years – and yet this year it doesn’t even make the top three.
This could be a sign of the fragility that remains in the markets but then, the NASDAQ hit new record highs in each of the prior four days and breached 10,000 for the first time ever. This comes before the end of what could be the worst quarter in a century for the economy. Incredible.
Speculation around new waves of coronavirus cases is going nowhere any time soon, as countries look to reopen their economies and save businesses and jobs. But next week also brings a plethora of interest rate decisions as well which means more rate cuts and more asset purchases. In other words, more fuel for the fire. The disconnect between the markets and the global economy isn’t going to improve any time soon.
United States
It seems a second wave of the coronavirus is hitting the US and could very well derail a lot of the reopening momentum that was taking place. As states reopen and Americans return to pre-pandemic behavior, it is expected that a rise in new coronavirus cases would occur. The White House is convinced they have yet to see any relationship between reopening and increased cases. If hospitalizations continue to increase, you could see many individuals decide to remain a part of the stay-at-home economy. If the virus spread intensifies, restrictions will be tightened and that will put a damper on the economic recovery prospects.
On Tuesday, Fed Chair Powell will follow his downbeat FOMC presser with his semi-annual monetary policy report to the Senate Banking Committee. With little time between events, it is unlikely for Powell to deviate from Wednesday’s rate decision. Traders will also pay close attention to the release of US retail sales, which is expected to show a rebound from the record low seen in April.
United Kingdom
The UK experienced its sharpest contraction on record in April, the first full month of the lockdown. The economy contracted by 20.4% at the start of the second quarter which is expected to be the worst month of the three.
Next week the Bank of England is expected to increase its bond-buying in response to the pandemic, with £100-200 billion added to its quantitative easing program. This comes as government borrowing spikes to fund the crisis which would have otherwise risked pushing up borrowing costs.
Brexit
High-level talks between Boris Johnson and Ursula Von Der Leyen are expected to take place next week, possibly as early as Monday, as the two sides look to reconcile the significant differences ahead of the 31 December transition expiry. As it stands, no deal is the default and the UK is expected to formally rule out an extension once again. We’ve seen this all before though and compromise tends to come late in the day. Still, business could very much do without this in a pandemic year.
Russia
The Central Bank of Russia is expected to cut interest rates by 50-100 basis points when it meets next week, from 5.5% where it currently stands. Like many others, the economy has been ravaged by the coronavirus crisis and contracted 12% in April, and May is not expected to be any better.
Switzerland
The SNB is not expected to cut interest rates next week, with the main policy rate remaining at -0.75%. The central bank is active in FX markets, with its holdings of foreign currencies recently rising above 800 billion Swiss francs – greater than the output of its economy – as it seeks to stop the currency rising too far as a result of safe-haven flows. The central bank hasn’t set an official floor for the EUR/CHF pair – hopefully learning lessons of the past – but 1.05 is believed to represent the informal level.
Norway
The Norges Bank is not expected to cut interest rates next week, with the main policy rate currently sitting at 0%.
China
China Industrial Production (4.5%E) and Retail Sales (-2.0%E) on Monday. The poor number could see Asian markets weaken depending on Wall Street’s Friday performance. Ongoing tensions with the US over HK, trade and COVID-19.
Hong Kong
Protests have died down for now over the securities law. Possible resurgence this weekend. HSBC and Stan Chart under fire for backing China’s HK security law.
India
The economy continues reopening but COVID-19 cases are spiking, and markets are reacting negatively. The standoff with China continues in the Himalayas but negotiations continue.
Australia
Australian stocks and Australian dollar sold heavily on equity correction into the week’s end. Negative results on Friday for Wall Street should see that trend continue into the first part of the week. Australian markets are among the most vulnerable to deep bull market correction. RBA minutes will be released Tuesday. We will look for talk about negative interest rates, which would be potentially bullish for stocks. Unemployment released Thursday (6.9% E) will drive intraday volatility. Otherwise, what happens in the US will drive sentiment.
Japan
The BOJ policy meeting is set for Tuesday. Unchanged at -0.10% but looking out for more stimulus measures. Stocks remain positive. Tankan and Trade Balance are released Wednesday, but are unlikely to impact markets. Markets will be led by Wall Street after sell-offs this week.
Market
Oil
Oil didn’t escape yesterday’s backlash, with crude falling more than 5% on apparent fears around rising case numbers. Again, we have to take this in the context of an asset class that has done rather well over the last couple of months. It’s been some rebound and I think some serious profit-taking may have kicked in. It’s creeping higher again today but $40 may remain an upside barrier for WTI.
Gold
Gold has been range-bound for the last couple of months since it first tried to break $1,750 only to quickly run out of steam. It’s tried again a few times since, each as unsuccessful as the last, and it looks to be suffering the same fate again this time. It’s pushing a little higher again as it looks to capitalize on dollar weakness but we could see it run into difficulties once again unless the greenback continues its journey south.