Duncan Donald

Fri, May 29

The US Dollar falls as stocks surge due to economic optimism

As global Covid-19 cases surpass the 3 million mark there can be no mistaking the devastating impacts it held over the world since Q1 2020.  However, over the last few weeks, we are seeing some strong indication that the worst is behind us. Obviously, there will be a lagging effect for those countries who were behind the curve on initial impacts of the virus namely the US and the UK, but there is evidence of strong progress in both countries.


Of course in time there will be questions raised around governments handling of the situation, where countries like Sweden were initially praised for their decision not to lockdown only for them to have one of the worst per capita case levels in a developed country. The poster child for success is without question New Zealand who were quick to lockdown households and borders meaning this week they have declared 5 days of no new cases and no active cases of the virus in their hospitals, and whilst this is an incredible accomplishment it certainly comes at a cost with them having to spend almost 50% of GDP to accomplish it. So, whilst you cannot put a price on lives, this spend will be a weight around their shoulders for years to come.


With Europe, the US and now the UK starting to head out of lockdown, the stock markets continue to post up days clawing into the huge fall seen earlier this year. With the insurance of the Central Bank “do whatever it takes” backing for US companies, the US Indices have led the way with the tech heavy Nasdaq already flirting with all time highs and the S&P 500 back above 3000. There do remain concerns perhaps not even in the next few weeks, or even month we get a buy the rumour sell the fact situation. As a reader of a large quantity of economic commentary there has been a marked shift to positive sentiment and often this can be an alarm bell.


One key area of concern is the complacency and acceptance of businesses in the furlough scheme, whereby companies are bearing little to no responsibility for staff’s wages. We again this week saw over 2 million new unemployment claims in the US. The lifting of lockdown will not be like flicking a switch and back to normal. There will be a shift in spending and leisure patterns brought from what has become the new normal, as well as the safety restrictions that will limit shops and the food and drink sectors. If we look at the fact that some New York bars and restaurants have to trade at 60-70% capacity to break even, safety standards in the next few months could simply not permit this, not making it viable for many to reopen.  So, we remain mindful that the progressive lifting of lockdown could lead to high street and leisure insolvencies if not managed sympathetically by governments.


Naturally, the escalation of trade tensions between the US and China raises another concern for the markets this week.  Developments in HK will need to be carefully watched and the markets await a statement from Trump during the US session Today.


In the UK the Pound has enjoyed a strong week, climbing back to 1.2350 and whilst aided by a weakened US Dollar, the Pound strength came from agreement from the EU over fishing rights and showed that collective agreement can be made, fueling confidence that Brexit talks may not be heading for a “no-deal” scenario. Whilst the PM should have been concentrating on the health and economic recovery of the country this week, he has had to deal with the wrath and anger of not just his public, but members of his own party after publicly backing his chief aide Dominic Cummings, who clearly breached the lockdown laws he had created.  Despite calls for his resignation the PM backed his man, creating great disharmony for those who had adhered to these laws at the cost of seeing loved ones at a grave time of crisis. This situation coupled with the UK having one of the worst death rates, will of course raise questions on the PM’s ruling in this short time since taking over leadership, and perhaps impact his negotiating ability with the EU if it becomes evident the public are not behind him.


The Week Ahead


Monday: Spanish, French, Italian and German PMI manufacturing numbers in the morning before US and Canadian PMI and ISM in the afternoon.

Tuesday: Interest rate decision from the Reserve Bank of Australia. UK mortgage data

Wednesday: Australian GDP. UK services PMI. US ADP employment data. At 3pm we get US ISM non-manufacturing data and Bank of Canada Rate Statement

Thursday: Service PMI from most European countries dominates the morning. At 12.45 we hear from Christine Lagarde’s ECB as they deliver their stimulus plans at the ECB rate setting announcement and press conference.  We also get US weekly unemployment data.

Friday: German factory orders in the am. In the afternoon we get US non-farm payrolls, average earnings and monthly unemployment as well as Canadian employment data.