The Weekly Alpha: US/China Tensions Heighten
The trading week begins with a relatively quiet start in terms of economic releases, ensuring that the coronavirus pandemic and the weakening US/China relations remain the centre of attention. Equities and oil prices are higher as investor’s welcome signs of the lockdown ending but markets still remain cautious as we don’t know whether the damage will be a lot worse than feared or the recovery will not be as quick as expected.
US/China tensions are going to be in the spotlight this week. The Trump administration stepped up its campaign of blaming China for the coronavirus pandemic, with an aide suggesting Beijing sent airline passengers to spread the infection worldwide. China, meanwhile, criticised new U.S. export restrictions targeting China based firms and vowed to take all necessary measures to defend its companies.
The US economy's recovery from Covid-19 could stretch until the end of next year, according to Federal Reserve Chairman Jerome Powell. “For the economy to fully recover people will have to be fully confident, and that may have to await the arrival of a vaccine,” Powell stated these aired on CBS. He also commented on using negative interest rates, saying they're "probably not an appropriate or useful policy for us here in the United States.”
Regulators across Italy, France, Spain and others have decided to end the ban on short selling, which was introduced in March. This move signals greater confidence among regulators that the worse of the current climate is over for equities.
In FX, GBPUSD’s sell-off through key support on Friday and closed at the lows. Brexit talks have not been supportive for sterling, after recent talks ended with no progress. Time is running out and participants become less sure that either side has the political will or capital to be able to deal with negotiations as the pandemic has taken precedence. There has been rumours to the Bank of England looking at negative rates has also put pressure on sterling.
WTI Oil has made a comeback as prices rise $1.70 to above $31 and Brent futures also traded higher amid signs the market is rebalancing faster than had been expected. Easing of lockdown measures has been positive. OPEC has been talking up making further cuts to their production levels for a longer period of time. It seems the market participants are seeing it as not as bad as was once thought in oil, but fundamentally the issue of storage capacity remains as long as supply exceeds demand and how OPEC will manage this will be crucial.
Britain will be in focus of Covid-19 vaccine hopes as AstraZeneca Plc aims to make as many as 30 million doses available to the UK by September, and has committed to delivering 100 million doses this year, if the trial’s which is already being studied in humans is successful. Europe continues to ease its lockdown measures, as the UK and Italy reported the fewest deaths since March, while France saw the most fatalities in three weeks.
Bitcoin halving had taken place in the previous week and block 630,000 was processed on the Bitcoin blockchain. The Bitcoin subsidy paid to miners was cut from 12.5 Bitcoins to 6.25. It felt momentous with the hype that was built leading into it but had little reaction in the price. You should not expect a significant change in prices in the short term. Its significance is more that it could trigger a new wave of financial innovation that supports the growth and increasing sophistication of the Bitcoin mining industry.
Looking ahead, we will get an indication to the UK economies overall health, this includes the first pieces of data of April, and therefore covering a full month of lockdown. This week’s labour market numbers are set to show unemployment rising, while CPI is set to have increased in April, and retail sales are set to have fallen last month. The question is how far those numbers are from their estimates is what will lead to the largest moves. Also this week will be the latest flash PMI surveys, from Europe and the UK.
A key point to mention, PMI’s tell us whether things are better or worse than the previous month, but now how much better or worse. Therefore, a PMI above 50 does not mean the economy is back to where it was before, it merely means things are less bad than it was a month ago. On the monetary policy front, this week sees the release of minutes from the latest ECB, FOMC and RBA meetings.