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Tradingview Weekly Market Wrap 18 May 2020

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Cold war 2.0?


Despite certain negativity, European Macroeconomic data has exceeded expectations, with industrial production decreasing by 12,9% in March vs 13,6% expected. Seasonally adjusted GDP decreased by 3.8% in the euro area and by 3.3% in the EU during the first quarter of 2020, compared with the previous quarter. The number of employed persons, on the other hand, decreased by 0.2% in both the euro area and the EU QoQ.

The OECD unemployment rate rose to 5.6% in March 2020 (up from 5.2% in February 2020), reflecting the negative impact of the Covid-19 pandemic, while early data for April signal an unprecedented increase. To be more precise, the number of unemployed across the OECD area rose by 2.1 million to 37 million in March. The rise was particularly marked among women and young people aged 15 to 24.

The first estimate for euro area exports of goods to the rest of the world in March 2020 was €193.3 billion, a decrease of 6.2% compared with March 2019 (€206.1 bn). Imports from the rest of the world stood at €165.0 bn, a fall of 10.1% compared with March 2019 (€183.5 bn). As a result, the euro area recorded a €28.2 bn surplus in trade in goods with the rest of the world in March 2020, compared with +€22.7 bn in March 2019. Intra-euro area trade fell to €153.3 bn in March 2020, down by 12.1% compared with March 2019.

Now, IMF forecasts global growth at –3.0 percent in 2020, an outcome far worse than during the 2009 global financial crisis. Most economies in the group are forecast to contract this year, including the United States (–5.9 percent), Japan (–5.2 percent), the United Kingdom (–6.5 percent), Germany (–7.0 percent), France (–7.2 percent), Italy (–9.1 percent), and Spain (–8.0 percent). The group of emerging market and developing economies is projected to contract by –1.0 percent in 2020; excluding China, the growth rate for the group is expected to be –2.2 percent.

Emerging Asia is projected to be the only region with a positive growth rate in 2020 (1.0 percent), albeit more than 5 percentage points below its average in the previous decade.

Eventually it will weigh heavily on inflation. Inflation expectations have fallen over the last few months, something that may depress wage growth. The demand shock affecting the economy is overshadowing the supply shock. It is expected that core inflation will slide over the coming quarters end next year at levels that are not far from zero.

In this context, the risks of a sustained period of modest deflation are increasing. Thus, large-scale net asset purchases are likely to be part of the Eurozone landscape for the near future.

The FED and Jerome Powell.

During the speech at the Peterson Institute for International Economics, Washington, D.C., Jerome Powell said that negative interest rates wouldn’t bring any good to the U.S. economy.

“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.

We ought to do what we can to avoid these outcomes, and that may require additional policy measures. At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well underway. Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”


Rent and REIT problems

Companies began to cooperate, refusing to stump up their rent until they see a discount. WeWork wasn’t able to pay leaseholders rent at some of its 700+ locations. Starbucks is trying to renegotiate rents, requesting 12 months of concessions, starting June 1, “to support modified operations and adjustments to lease terms and base rent structures, so we can withstand this uncertainty together.”

And with an additional 3 million Americans losing their jobs last week, it doesn’t look like demand for space in offices will recover very soon. In this context, it shouldn’t be a surprise that REITs have fallen way more than the wider stock market.


US/China relations

US/China relations are at risk for a second round of confrontation later this year. According to Raymond James, the combination of the economic disruption from the spread of the virus and election-year politics may lay the groundwork for the return of the Trump trade war playbook, possibly re-emerging as a market headwind in the second half of this year.

It is worth mentioning that the U.S. Senate approved legislation on Thursday to toughen its response to China’s attack on its Uighur Muslim minority. After that, the Trump administration issued a new rule Friday that will bar Huawei and its suppliers from using American technology and software.

China, in turn, may also impose sanctions on US entities and state officials in response to lawsuits filed against Beijing.


Macro of the week

Retail sales fell 16.4% in the initial estimate for April, following an 8.3% decline in March, with sharp declines in restaurants, clothing stores, department stores, auto dealerships, and gasoline stations. Industrial production fell 11.2%, with manufacturing output down 13.8%. The University of Michigan’s Consumer Sentiment Index improved to 73.7 in mid-May, vs. 71.8 in April.

Jobless claims fell to 2.98 million, but were still elevated. Prior to seasonal adjustment, 33.5 million claims have been filed in the last eight weeks, 20% of the labor force.

The Consumer Price Index fell 0.8% in April (+0.3% YoY), reflecting lower prices for gasoline, apparel, car rentals, airfares, and hotel lodging, offset only partly by higher food prices at grocery stores. Ex-food & energy, the CPI fell 0.4% (+1.4% YoY).

Weekly market performance


Macroeconomic Data & Events

The key data in the week ahead will be the flash PMI surveys for May for the US, Eurozone, UK, Japan, and Australia. The data will suggest whether these economies have bottomed out after many countries started to ease some of the restrictions designed to contain the COVID-19 outbreak.

May 18: Japanese GDP for the first quarter. Most importantly, the WTI June contract expires on 19 May, so Monday may be quite volatile given that oil prices grew over 51% since the beginning of May.

May 19: The ZEW economic sentiment index for Germany and the EA will be released. In addition, we will know the latest job report for the UK. Finally, ECB’s Lane and Fed’s Rosengren speak and Fed’s Powell testifies at the Senate.

May 20: On Wednesday, the People’s Bank of China will announce its rate decision. Theoretically, they could announce this year’s third rate cut for medium-term loans to ensure sufficient liquidity. Besides that, FOMC minutes from the latest US rate decision will be published. Finally, UK inflation and consumer confidence for Denmark and the Euro area will be released.

May 21: Will be a day of PMIs for the US and UK, US initial jobless claims and the Philly Fed manufacturing index. In addition, Fed’s Williams will present at a webinar.

May 22: The week ends with PMI figures for Europe and the latest retail sales for the UK.


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