Week Ahead: Recovery concerns, US-China spat could undermine risk appetite

The week’s key macro data include Japanese GDP, a few macropointers from the UK and Eurozone flash manufacturing and services PMIs. 

In the week ahead, the key themes driving sentiment will likely be similar to those we have been getting to accustomed to over the preceding weeks. There will be a few important macro pointers to look forward to, with European manufacturing and services PMIs arguably the most important. So, we will get the first key snapshot of how some of the eurozone economies have fared since the gradual re-opening post the covid-19 lockdown. We already found out on Friday how bad the first quarter was, with the Eurozone and German economies shrinking 3.8 and 2.2 percent, respectively.  
Summary of this week

This week has been a volatile one. Stocks have been falling with weak recovery attempts here and three, while safe havens gold and silver broke out on ongoing macro concerns and a sharp escalation in the war of words between the US and China. Crude oil put in a good showing on signs supply is finally responding to the OPEC+ cuts and on expectations of a recovery in demand as economies slowly re-open. In FX, the Dollar Index was on track to close higher for a second consecutive week with the pound, euro and especially New Zealand dollar falling sharply. The greenback came under a bit of pressure on Friday thanks to a poor retail sales report, but it has generally been supported against non-haven assets by comments from the Federal Reserve Chairman Jay Powell that (1) negative rates are not on the table and (2) that that there won’t be V-shaped recovery, thus creating haven demand for the dollar against European currencies and commodity dollars. The kiwi was hurt on the back of the RBNZ’s decision to expand QE significantly while simultaneously announcing that negative interest rates will become an option in the future if needed.

Economic recovery will take time

Watching incoming macro pointers closely will be important in the weeks ahead and equity investors are finally making a more sober assessment of the global recovery, at least judging by the struggles of the stock markets in the past week. There is a growing belief among analysts that the vast central bank and government stimulus packages announced due to the COVID-19 pandemic is not enough to compensate for the bearish factors weighing on the markets. Unemployment has skyrocketed across the globe and companies are filing for bankruptcies left right and centre. The worst part is that there is no way of knowing when things will go back to normal and whether there will be another and subsequent rounds of infections to contend with. So, while central banks and governments are doing all they can to address the supply side of the economy, demand from households and businesses could nonetheless remain soft for a long time and undermine economic recovery.

China vs. USA

It is also worth keeping a very close eye on the rapid escalation in the war of words between Beijing and Washington. US President Donald Trump has said he doesn't want to talk to Chinese President Xi Jinping right now, as he blames China for the spread of the virus. On Friday, Global Times Editor in Chief, who apparently has close ties with the Chinese government, said Beijing may activate the so-called unreliable entity list and restrict companies such as Qualcomm, Cisco, Apple and suspend purchase of Boeing planes.

Data highlights:
  • Monday:  Japan Prelim GDP q/q
  • Tuesday: UK wages, jobless claims and other employment data; German ZEW; US building permits and housing starts, and Fed Chair Jay Powell testimony
  • Wednesday: UK CPI and a speech by BoE Governor Bailey
  • Thursday: UK manufacturing and services PMIs (Bank holidays in Germany, France, and Switzerland)
  • Friday: Eurozone Flash Manufacturing and Services PMIs
Chart to watch: Dow Jones

Barring an unexpected rally late in the day on Friday (when this report was written), for the first time in several weeks global stock markets and futures looked set to close the week decisively lower, thus ending the rebound rally off the March lows for the time being. Could we see the onset of another leg lower from here? The Dow has hit THIS resistance zone and it has so far respected it:

Dow Jones