Duncan Donald

Fri, Jun 26

Markets reflect renewed concerns about COVID-19

Global financial markets have extended the more indecisive theme that we saw through the middle of June into the end of the month, reflecting two competing forces.


On the one hand, the strong extension rally that was seen from the middle of May into the first half of June, that was at least partially driven by strong demand for stocks by retail investors, continues to be supported by positive economic data. Of particular note over the past week has been the Markit Flash Purchasing Managers Index (PMI) data for June from Europe and the US, which significantly beat market expectations.


The renewed outbreaks of the COVID-19 coronavirus globally and the ongoing growth of the pandemic in some US states has seen growing concerns about the unlocking of economies.


There have been significant outbreaks in Australia, Japan and also in Germany, where the R-rate has spiked significantly higher. Furthermore, the authorities in China continue to deal with the outbreak in Beijing, but the most worrying data comes from the United States.


Many of the southern US states have seen significant increases in the number of coronavirus cases over the past 1-3 weeks, with Texas, Florida and Arizona standing out particularly. This has seen some of the easing of lockdown measures being walked back in Arizona.


Although President Trump continues to state that there will be no new lockdown, markets are clearly concerned that there will either be a second wave of infections, potentially leaving to an increase in the rate of deaths, or that the economy would have to be put under renewed lockdown measures.


In the UK, the government has announced that from July 4th many lockdown measures are to be further eased, including the reopening of pubs, restaurants and cinemas. Although this is positive for the economy, clearly there are worries regarding the potential for an increase in the spread of COVID-19. These concerns are highlighted by the chaotic scenes seen over the past week on UK beaches during the hot weather. Sound bites coming out of Europe, particularly from Michel Barnier, have indicated ongoing friction in the Brexit trade negotiations.


In the markets, global stock indices have been confined to relatively narrow ranges compared to the more volatile price action that has been seen for much of this year, chopping between recent June peaks and troughs.


This has been echoed in the foreign exchange markets, where most of the major currencies have marked time versus the US Dollar, though there has been notable US Dollar strength versus the Euro and Pound. The Pound has been under some downside pressure due to the aforementioned trade deal difficulties.


The Week Ahead:


Monday: A relatively quiet day starting with Japanese Retail Trade data, EU Business Climate, then German CPI the standout, John Williams from the Fed is due to speak later in the day. 


Tuesday: Japanese Unemployment & Industrial Production, plus Chinese PMI data are released in the Asian session. UK GDP and EU CPI are posted in the European session and we get Jerome Powell testifying, with Treasury Secretary Mnuchin also speaking in the US session.


Wednesday: Global Manufacturing PMI data is released throughout the day by Markit, with the US PMI also released by the ISM. Germany post its Employment data for June, then ADP Employment data for the US is also released. The standout, however, is the publication of the FOMC Minutes.


Thursday: Because of the Independence Day holiday being observed on Friday, the US Employment report is out a day early and is the spotlight for Thursday and the week. 


Friday: As Independence Day falls on a Saturday, the holiday is being observed in the US on Friday July 3rd, with US financial markets closed. Data to watch will be the Markit Services and Composite PMI.