Monday’s Bullseye: 6 July 2020

Here is our week ahead preview for the week commencing 6 July 2020. 

The first week of July is about to end with sentiment towards risk assets still pretty much positive, although with US investors away for 4th July holidays profit-taking hit European shares on Friday morning. Overall, though, optimism over a sharp global economic recovery this week offset ongoing concerns over Covid-19 infections, which rose to a new daily record high in the US. Boosting recovery hopes and keeping the V-shaped rebound narrative alive were the stronger global PMI data and the June non-farm payrolls report, which revealed some 4.8 million jobs were added in the US economy and the unemployment rate fell to 11.1% from 13.3% previously. Clearly, momentum is currently bullish. But with the markets at or near record highs and summer months historically not a great period for stocks, the one-way trade could end soon – especially with uncertainty remaining elevated at the start of the third quarter.
Investor head into an uncertain Q3
Going into next week and the third quarter, the markets will face more uncertainty. There is the potential for a new wave of coronavirus to emerge, even though the first wave is far from over given the situations for example in the US, Latin America and South Africa. Stock investors will start finding out exactly how the lockdown has hit company profits, with the second quarter reporting season soon to kick off. Then there is the ongoing trade friction between the US and China to deal with, not to mention Brexit and other geopolitical risks. Meanwhile, the impact of vast stimulus programmes announced by governments and central banks during the height of the pandemic will diminish.
So, given all these risks, I think is unlikely we will see another impressive quarter for equities, even as easing of lockdown measures should boost economic recovery. The only caveat I can think of is if the economic recovery accelerates sharply, which is not impossible given the huge stimulus programmes.  In fact, incoming data since the peak of the pandemic suggests the economic recovery is happening at a faster pace than expected. We have seen, for example, record jumps in US employment and retail sales already. But the key question is whether there will be follow-through in the improvement of incoming data over the next few months, as those jumps were from historically low bases.
Economic calendar highlights
Unfortunately, the economic calendar is rather quiet in the week ahead, with only a handful of potentially market moving numbers to look forward to. So, we will not have much data to assess whether we have had some follow-through in improving economic conditions. Thus, the focus will be more on Covid-19, Brexit, and other geopolitical risks in the week ahead.
  • German factory orders
  • Sentix Investor Confidence
  • Eurozone retail sales
  • ISM services PMI
  • RBA rate decision
  • German industrial production
  • JOLTS jobs opening
  • Japan machinery orders
  • German Trade numbers
  • US weekly unemployment claims
Friday - Canadian employment data
Serious divergences remain in Brexit talks
So, with the economic calendar being fairly light, investors will be focusing on Brexit and obviously coronavirus which is still not under control in the US. In so far as Brexit is concerned, trade negotiations with the European Union ended earlier than expected. Michel Barnier, the EU’s chief Brexit negotiator said that “serious divergences remain.” However, officials have denied the early finish was a sign that talks have collapsed, and discussions will resume as planned next week. In the event that those divergences do not close down, then UK assets may come under pressure on concerns over a messy exit. So, our featured chart to watch is the GBP/USD, which could go sharply in one or the other direction depending on Brexit talks and sentiment towards risk next week:

Source: and ThinkMarkets