Marknadsövervakning - 11th May 2020

The EU-UK talks restart this week with the agenda showing talks on trade in goods and services and fisheries being conducted Tuesday to Thursday inclusive, with plenary sessions on Monday and Friday, when all members will be present via video link. The Bank of England last week, when discussing the possible future paths for the economy, suggesting two events which are open to question. Firstly, that the UK would experience a V shaped recession, GDP dropping 14% this year before bouncing back 15% in 2021.

As the Prime Minister suggested yesterday, the lockdown procedures will take time to be relaxed and this indicates that the recession will be more a U rather than V shape. Secondly, the Bank also assumed that the UK will move to an agreed trading agreement with the EU on January 1st, 2021. We would caution that even if this is the case, the trade deal maybe a very basic one and there could even not be a trade deal at all. We receive a slew of economic data on Wednesday, including preliminary GDP readings and industrial production, which will help us gauge whether the BoE will be correct or not.

The European Commission was relatively downbeat last week about the possible economic slowdown and is aware that this crisis needs to be handled correctly. In relative terms the Eurozone economy will perform better than the UK, and we will look to the ECB economic bulletin on Thursday to see their thoughts and forecasts. Unfortunately, there does seem to be disharmony amongst the member states with the German court ruling that the ECB’s bond buying broke the law, even though we are confident that this particular issue will be resolved, and it will be shown that the ECB’s bond buying has been proportionate. The issue is that this makes the possibility of corona bonds very unlikely and increases the odds that EU fiscal stimulus package will be in the form of loans. We have already seen Fitch downgrade Italy because of its debt burden. More debt for Italy would give the market real reason to sell the euro.

The President is very keen to open up the economy. Last week’s Non-farm payrolls data showed why, with 15% of the population unemployed. This week we have CPI and retail sales for release and expect CPI to fall 0.7%, and retail sales to fall 11% from last month. These are very stark numbers, and Fed Chair Powell will speak on Wednesday about the current economic issues caused by the pandemic. The issue for the US economy is just how the virus will spread when the economy is opened? If it causes the economy to be closed down again, then the President's chances of being re-elected will suffer. He has not provided a calm, steady narrative during this crisis and his approval ratings have fallen again to the low 40's. The dollar strengthened last week on euro and sterling weakness, but the future is exceptionally uncertain.
The AUD had a good week against the US dollar, gaining some 2.5% as did the rand with the gains coming at the end of the week, and the publication of the awful US jobs data. Australian jobs data is released on Thursday and business confidence on Monday. The AUD is enjoying support from the fact that the country is one of the first to be able to reopen its economy.
South African jobs data is out on Tuesday with the unemployment rate forecast to jump to 35% from its current 29%. Finance Minister Mboweni hinted last week that they may look at salvaging South African Airways in a similar fashion as Switzerland did with Swiss Air. When it became Swiss International Airlines. 

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