Week Ahead: Gloomy data to highlight extent of covid-19 damage

Last week saw the equity markets rally, with the US tech sector leading the charge once again. Oil prices also recovered, and most risk-sensitive currencies rebounded sharply. Investors were in optimistic mood, hoping that the world’s largest economies will rebound sharply as lockdown measures slowly ease around the world. The slight thawing of war of words between the US and China aided the recovery further. However, incoming economic data continued to paint a bleak picture as highlighted by a whopping 20.5 million US nonfarm job losses in April. Yet, the optimistic Mr Market looked through the dire data once again, hoping that the decisive actions of central banks and governments will help get us out of the mess that the invisible enemy has got us into.

Stocks under pressure after positive open

The buoyant mood from last week carried into the open of trading this week with Asian markets closing higher overnight and Europe starting on the front foot as the disconnect between economic data and financial markets continued. But the indices started to give up their gains a couple of hours after London opened in what is a quiet day for economic data. It will be interesting to see whether the selling will continue, or US investors will once again come in and lift the markets higher. The fact that the dollar was also pushing higher pointed to a slight risk-off tone, though gold and yen had so far not reacted positively.

Looking ahead to the week

This week’s key macro events include GDP data from UK, Germany and Eurozone, as well as more up to date Chinese industrial production and retail sales numbers. The latter should give us some clues as to whether activity at the world’s second largest economy rebounded as quickly as the markets are hoping post lockdown. Meanwhile we will also have some key US data including CPI and retail sales, as well as Australian employment data, which should reveal massive job losses. Here is the list of the data highlights:

Tuesday:

 
UK Q1 GDP (Wednesday): The country’s Covid-19 lockdown happened after Q1, but things were not looking great in the lead up to the lockdown at the end of March anyway. So, we are expecting GDP disappoint, tracking the economic slowdown in Europe and the US. Here, GDP is expected to have contracted by 2.5% in Q1 after a flat Q4. If confirmed, then you can safely assume that the UK economy has almost certainly fallen into a technical recession in Q2 because of the lockdown. Don’t expect manufacturing production and construction output to reveal anything positive either.
 
China Industrial Production and Retail Sales (Friday): China contracted 6% in Q1 as a result of the lockdown, but the economy has since struggled after it reopened – judging by those big drops in retail sales in February and March. Investors will be hoping that retail sales in April would be much better, although it is still expected to show a 5.9% y/y drop. However, industrial production is expected to print a positive number: 1.5% y/y.
 
German and Eurozone Q1 GDP (Friday): Though Germany has been successful at keeping the covid-19 death rates low, the economy is unlikely to have avoided a contraction in the first quarter. This is because Germany is an export-oriented economy and so with much of Europe in lockdown, demand for German exports should have collapsed. Economists are predicting a 2.3% drop in GDP, but it could be a lot worse. If so, the Eurozone GDP, released on the same day, will likely miss the forecasts too.
 
US data dump (Friday): With a record jump in unemployment, don’t expect a speedy recovery in retail sales following its 8.7% collapse in March. In fact, sales are expected to have fallen even more sharply in April, by a huge 11%. Similarly, industrial production is expected to have dropped around 11% m/m. And with the economy falling apart, the UoM Consumer Sentiment index should show another depressing number, with expectations centred around 67.7.
 
Meanwhile on a micro level, Marriott International’s first quarter results will be watched closely on Monday by stock traders as it will provide a gauge for how bad the travel and leisure industry fared in the first three months of the year as a result of the spread of coronavirus across the world. Another heavily company whose shares are heavily traded is Vodafone which will be publishing its full-year results on Tuesday. The telecoms giant has struggled over the past two years and was forced to cut its dividends due to rising debt levels. Finally, results and guidance from Balfour Beatty on Thursday should provide a snapshot of the dire state of U.K. construction sector.
 
Featured chart: Brent crude oil

After the two-week rally into THIS resistance zone and ahead of this week’s key economic data releases, it will be interesting to see whether oil prices will recover further or resume lower given the lack of demand and excessive supply:


Source: TradingView and ThinkMarkets
 
Any sharp changes in oil prices could have implications for energy stocks and the wider markets.