Financial markets are still primarily focused on the fight against COVID-19. In the U.S., coronavirus deaths are now climbing at a staggering pace and concerns are high that many states have acted too slowly in providing measures to mitigate the spread of the virus.
Europe is also reporting terrible news on the virus front as both the UK and France have had some of their deadliest days with the outbreak. Italy may have some optimism that deaths and new cases are stabilizing and Spain may be showing signs that the death rate is declining. Asia is once again tightening their borders as a new wave of infections may have been imported. Global economic activity will not return anytime as over 90% of the world’s GDP has some type of social distancing measure in place.
Over the next couple of months, the economic data will be disastrous in both Europe and the U.S. A lot of the negative sentiment is already priced into the market, but if traders become skeptical that much of the global economy will not reopen by June, risk aversion could reassert itself firmly back into the driver seat.
U.S.
It is that time of year for the largest U.S. banks to show how prepared they are for worst-case scenarios that probably fall short of what financial markets are currently experiencing. The annual stress tests begin by the banks submitting their data and capital plans on Monday. Results are expected in June and will try to restore confidence that the financial system will be able to handle the worst-ever quarterly contraction and an astronomical surge in unemployment.
The primary focus in the U.S. will remain on containing the outbreak as it makes its way across the country. Much attention will also fall on the economic data that will start to show the impact of much of the country falling to a stop. Economists are trying to figure out how bad the economy will contract and how high the unemployment rate will skyrocket.
On Wednesday, the Fed will release their minutes to their second intra-policy March 15th meeting. The Fed threw the kitchen sink at this last meeting and the minutes will likely reiterate their aggressive stance on tackling the coronavirus crisis. The problem for the Fed is that the balance sheet is growing astronomically. The Fed can’t keep up this pace and will have to gradually slow down purchases before the economy is on a sound footing.
UK
The UK is still seeing accelerating coronavirus and cases as the lockdown continues. The number of cases and deaths are continuing to accelerate, although only the latter is really important given the number of people not being tested. It’s going to be an awful couple of weeks, with many predicting that the lockdown measures continue for months to come.
UK Epidemiologist, Neil Ferguson, offered some hope earlier this week that there were early signs that the numbers could stabilize over the next couple of weeks, both in the UK and Europe. That is encouraging, but so much of the last few months has taught us that predicting the future is extraordinarily difficult and even the most qualified among us are just making the best predictions with the information we have. The more information we continue to gather, the more reliable these predictions will be. For now, we cross our fingers.
Italy
While the death toll in Italy continues to look frightening and the road ahead is likely to continue to be hazardous, there are signs that a corner has been turned. The number of daily deaths is finally heading in the right direction which suggests we may be seeing the light at the end of the tunnel. Italy remains the country with the most deaths so far but the situation in Spain is also dire and the next two weeks are likely to be particularly troubling for the U.S. Hopefully Italy is now on the right track but the problems then, unfortunately, turn to the economy and little room the country has to support it, with corona-bonds no nearer becoming a reality. This will only spur support for long-term eurosceptic, Matteo Salvini.
Spain
Spain has also had a torrid time of it but new cases and deaths appear to be plateauing which will give some cause for optimism. There’s still a long way to go and the trend could easily reverse but it’s possible that Europe may be turning a corner, with its two worst-hit countries now seeing the light at the end of the tunnel. Unfortunately for the euro area, its fiscal response hasn’t matched its monetary one and unless that changes, this may well fuel another rise in euro-skepticism that triggers yet another crisis in the region. In every crisis there is opportunity and euro-skeptics across Europe may turn out to be the biggest winners in all of this.
South Africa
The South African rand has fallen to a record low after the country lost its last investment-credit rating. The aftermath is likely to be disastrous for outflows with some analysts seeing foreign investors pulling several billion dollars. The pressure will remain on the rand until the government delivers structural reforms and delivers aggressive measures to ensure financial stability.
China
Tensions are rising between the U.S. and China again, with China accused of not being truthful about their true COVID-19 infections data. U.S. is refusing to let U.S. importers forgo collecting China tariffs. Chinese PMI data has rebounded into expansionary, albeit from a low base, giving hope that China will lead the world economy from the bottom as it gets back to work and life returns to normal.
No significant data next week. The success of getting people out of their apartments and back to work, shopping, socializing and life will be closely watched. Worries persist about the 2nd wave of infections. U.S./China tensions are not helpful when the world requires leadership from both.
Hong Kong
No significant data next week. Retail sales and IP show the economy is still very deep in recession. Worries persist about imported cases of COVID-19 causing the 2nd contraction.
Singapore
MAS eased policy but generally was underwhelming in its scope. Content to leave the heavy lifting to the government. Singapore to tap reserves to pay for further stimulus. No significant data releases next week.
Despite its best efforts, COVID-19 cases, both imported and domestic, keep increasing. The risk that Singapore imposes more drastic lockdown measures to control, which will be another large negative for the economy.
India
No significant data this coming week. RBI announced a 3-month moratorium on all loans (including credit cards) this week. Allowed Indian Banks to access the offshore INR NDF market as INR makes record lows against USD at 76.4000.
Much of India is in partial lockdown. But serious doubts persist about the ability of Indian authorities to manage the COVID-19 outbreak. The numbers suggest that India is just at the beginning of the outbreak. Serious impact on economic activity and more pressure on the INR to come.
Australia
Low Australian Dollar has seen bargain hunting in Australian shares this past week. The good times are unlikely to last as the AUD remains at record lows, a resource demand shock internationally, and a slowdown in domestic activity as the country is partially locked down.
RBA rate decision Tuesday, expected to be unchanged. Financial stability outlook Thursday will be more closely watched. Expect RBA to announce further QE and possibly instruct Australian Banks and large corporates to suspend dividend payments.
New Zealand
No significant data next week. Focus remains on the country’s level 4 lockdown of population. To date, COVID-19 cases continue to increase though. Potential for stronger measures from the Government, including the deployment of the military to enforce. Negative for NZD with the economy set for another leg lower.
RBNZ instructed NZ banks today to suspect dividend payments and buy-backs to provide increased capital buffers.
Japan
Japan PMI data and IP data were less bad than expected this week. That said, markets are still awaiting Japan’s new stimulus package. Confidence eroding as government inaction persists and doubts continue over their COVID-19 response.
Household spending Tuesday expected to shrink 4.0%. Machinery Orders expected to fall by 2.0% on Wednesday. Potential for upside surprises in data though following a decent performance this week from China, South Korea and Japan. If the government finally announces its package details next week, that could provide more upside momentum in the short term for Japanese stocks.
Market
USD
The dollar remains a complicated trade. The Fed’s unprecedented measures have ameliorated the funding of dollar liabilities and that has put a dent in the dollar’s rally. The dollar’s days are far from over since not all strains are alleviated in the funding markets and the sharp global recession will likely keep Treasuries in high demand. The big question macro traders have is how long will the Fed’s extraordinary policy actions remain in place and will other central banks remain ultra-accommodative just as long as he Fed.
Gold
The disconnect in the market remains, with gold rallying around 1.5% Friday – more than 2% from its lows – alongside the dollar and the stock market. It’s slightly lower at the time of writing but is basically hovering around breakeven on the day but holding its position back above $1,600. Going into another uncertain weekend that could see some dire numbers, particularly from the US, it’s perhaps not surprising to see the nerves creeping in.
Bitcoin
Bitcoin finally managed to smash through $7,000 on Thursday and what an hour it was. Unfortunately, the cryptocurrency was quickly driven back below which may be worrying for those so keen to see this barrier broken down. Not to be deterred, we’re seeing another attempt today but the result is currently the same. This level is being well defended and if it’s not broken soon, the buyers may start to fade.