Marknadsövervakning - 18th May 2020

We had to wait for it last week, but the real market news came around mid-day on Friday. As expected, the UK and EU cannot agree even on the framework for the new trade agreement, with EU chief negotiator, Barnier, saying he was "not optimistic on Brexit talks." There is one more round of talks scheduled to start on June 1st, but having witnessed many EU negotiations, it is only at the last minute that the EU agrees a compromise.

So, we don't expect agreement then either. We should remember that the real deadline is not December 31st, but June 30th. This is because UK Prime Minister, Johnson, has stated that if no agreement is made by then, he will break off talks and use the following 6 months to prepare the UK to trade on WTO rules. In this case, the logical conclusion is that sterling will be under pressure at least until the end of June.

The direction after that time depends upon whether or not compromise is reached. The technical picture now points to a decline for GBP/USD to possibly 1.1850 or lower. GBP/EUR is not quite as bearish from a technical viewpoint but could easily fall faster than GBP/USD if the eurozone agrees a fiscal stimulus package that gains market confidence. MPC member Tenreyro speaks this afternoon.

Tuesday is an important day for the euro with EU Finance Ministers meeting all day. As mentioned above, if they can agree a support package for the eurozone that doesn’t saddle their members with massive loans, this would be a positive for the single currency. EU's Commissioner for Economy, Gentiloni, said two weeks ago on Bloomberg that he didn't think any member nations indebtedness was a real issue. However, the market disagrees with Italian debt to GDP ratio 160%. German ZEW economic sentiment is released on Tuesday, and we expect a small bounce to 30.0 from last month’s 28.2. Flash manufacturing and services PMI are released on Friday.

The dollar has been strengthening recently, but certainly not in a straight line. Supporting it has been the economy's strong performance, the huge US dollar 3 trillion stimulus package from the Fed and government combined, and the markets desire to buy the dollar as a safe haven. However, the dollar does stumble at times. Reports of how the country is opening up again whilst still seeing outbreaks of the virus are cause for concern, along with concerns for the erratic style of leadership. Also, the huge number of job losses, which now total 36 million, is an additional concern.

Nevertheless, there may be good news here, as JP Morgan said last week that 70% of those who had lost their jobs had actually been "furloughed", and as such, when able to, they could be given their jobs back. This is a positive point but one that is dependent on the business surviving the next few months. Retail sales were shown to drop the most in history, some 16.4% in April.

It is a tragedy that restaurants, entertainment and sports businesses, which rely on groups of people attending, may well take many more months before their customers have confidence to attend in large scale. Fed Chair Powell talks on Tuesday and Thursday. He spoke yesterday and warned that a US recovery could take until the end of 2021.
The AUD lost 1.5% against the US dollar last week, although gained against the NZD and sterling. It had gained some 15% against the US dollar since its March low. However, storm clouds may be gathering as the country's relationship with China is worsening. The Australian government has called for an independent enquiry into the source of the virus at Wuhan, and China has belligerently rebuked this perfectly normal request. China has also now banned beef imports from some Australian meat producers, claiming that it falls below certain standards. This has encouraged AUD weakness. Monetary policy meeting minutes are due out on Tuesday and RBA Governor Lowe speaks on Thursday. 

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