Brewing geopolitical risks helped investors take some risk off the table heading into the long weekend. The dollar rallied against most of its peers as tensions remain front and center for the world’s two largest economies. Renewed unrest in Hong Kong will continue to weigh on the overall outlook as Western nations contemplate how to react to China’s new national-security laws on Hong Kong. Investors will also continue to focus on the easing of coronavirus lockdowns globally, signs of rebounding economic activity, and any progress with the treatments or vaccines for COVID-19. The annual meeting of China’s parliament, the National People’s Congress will continue with the focus on how they will achieve their jobless target of 6%. The upcoming economic data this week will provide incremental updates with the muted recovery. Earnings will focus on the Canadian banks, several retailers and Japanese manufacturers.
This won’t be your typical summer with falling volumes and a flat or slightly softer stock market. The fundamental outlook and Presidential election positioning will keep volatility healthy over the summer months. The Memorial Day to Labor Day trading period is likely to see significant moves early as the next few weeks will provide critical updates to the success of reopening the economy and with medical treatment and vaccine updates.
Country
US
The US economy is showing small improvements with the labor market and business activity, but concerns are growing that optimism will quickly fade if the US-Chinese relationship deteriorates even further. China’s new law on Hong Kong will likely see US legislation sanction them, likely triggering a tit-for-tat response from Beijing. Tensions between the world’s two largest economies will remain tense beyond the Presidential election and that could have a lasting impact on the dollar.
Damage to the economy from the coronavirus pandemic continues to ease as the economy reopens, but investors could quickly turn cautious if spikes of new cases turn up with some of the states that were on the earlier side of reopening.
US Politics
Joe Biden’s search for a running mate could be coming to an end. Biden may try to unite the party by picking Senator Elizabeth Warren. Warren’s pivot on her stance for a government-run “Medicare-for-all” could suggest she is ready to support improvements to Obamacare. The debate also continues in the Senate as many Republicans support calls for additional stimulus. Senate Majority Leader Mitch McConnell wants to hit the pause button to assess the situation, but political pressure will grow as too many parts of the country are vulnerable and seeing muted recoveries.
UK
Speculation about negative interest rates in the UK is rife and BoE Governor Andrew Bailey only added fuel to the fire this week by refusing to rule it out, although he didn’t rule it in either. Rather, it’s under review. Given the BoE’s previous stance on negative interest rates, that’s a big change. Some easing is expected in the near future, either in the form of a rate cut, or more QE, which explains why the UK government was able to borrow at a negative interest rate on 3-year debt for the first time ever this week.
Brexit is back in the spotlight a little and contributing to general weakness in the pound. The coronavirus crisis has changed nothing as far as the government is concerned and this week, they released tariff plans starting next year. Whether this is just a big bluff or something more, who knows at this point. But to no-deal Brexit at this point would be suicide. A transition extension is still likely or at worst, a very broad outline of a deal that will be beefed up in the years after Brexit. That may depend on the EU’s willingness to accept the latter, with the crisis arguably giving them a little more leverage.
Turkey
Foreign restrictions on Lira transactions has taken the heat off the currency the last couple of weeks and enabled the central bank to cut interest rates by another 50 basis points this week, as the country fights a war on multiple fronts. The economy was already in a dire straights before it became the country in the middle east with the most recorded coronavirus cases and its currency plunged to record lows. The CBRT has been very aggressive with its rate cuts since its Governor was replaced, in only cutting in line with market expectations, it may be a sign they’re worried about the potential currency impact, given the amount of reserves the country has already burned through to prop it up.
South Africa
The South African Reserve Bank cut interest rates by 50 basis points to 3.75% this week, in line with expectations, and stated that the implied path of policy rates anticipates two more 25 basis point cuts over the next two quarters.
China
China is facing criticism on multiple fronts and is now changing Hong Kong’s basic law directly, circumventing the HK legislature. Howls of indignation and the threat of US retaliation is real over it is real. US-China trade relations were in trouble already and the heat has now ramped up. Real concern that a new trade war could emerge. Very negative China markets.
Hong Kong
Hong Kong equities slump 6.0% today as China announces intention to write security legislation into basic law, bypassing the HK legislature. This news spells a very real chance that Hong Kong as we know it is over. High probability of renewed street protests. Very negative for HK stock markets as well as China credibility. Big winner, Singapore.
India
India passed emergency rate cuts today and further stimulus from the central bank. Loan payment holiday extended for another three months. Will increase pressure on the non-bank financial sector. Negative for the INR and Indian equities.
Australia
Australia emerging from lockdown, positive. AUD and NZD have rallied strongly on the peak-virus trade but both fell heavily today after the Hong Kong announcement, and increasing trade tensions between China and the US. AUD and Aust. equites extremely vulnerable to further escalations in US-China relations. Approach with caution next week.
Japan
Bank of Japan announced extra stimulus measures today with little market reaction. Japanese markets are highly sensitive to moves in US-China relations and trade fall-out. That will dominate the news next week. An escalation is expected to be negative for equities, but positive for the JPY as a haven currency.
Market
Oil
The oil market is rebalancing, but rising doubts over the outlook for crude demand will likely keep the recent rebound in check. China’s economic recovery saw crude demand return to near pre-pandemic levels, but the outlook is starting to look worse amid concerns that China’s proposed security law for Hong Kong will further escalate US and China tensions and lead to economic penalties. If Asia starts to see lower growth prospects, that will continue to weigh on oil prices.
On the supply side, production cut efforts have been surprisingly compliant but that should not last as oil-producing nations will want to make sure they don’t lose market share. WTI crude will struggle to rally above the $40 level and should start to settle on a wide $25-$35 trading range.
Gold
The gold trade was overcrowded and calls for a bear trap were growing, but China’s decision to impose national-security laws in Hong Kong brought back another challenge facing the world’s second largest economy. The global economic recovery is very fragile and geopolitical risks and trade tensions will likely keep demand strong for safe-havens.
Gold’s recent bearish catalyst has been the relatively good start to the reopening of the US economy. With some form of eased restrictions with lockdowns taking place all over the country, investors will remain concerned that the US is vulnerable to several spikes with new cases over the next couple of weeks. Georgia opened three weeks ago and so far, has not had a significant increase with the rate of new infections as many people continue to stay home. It seems gold could see support either with a lackluster pickup in economic activity as Americans remain cautious to leave their homes or if a second wave of cases occurs.
Bitcoin
Bitcoin enthusiasts had a bad week after panic hit the markets that someone early to Bitcoin, possibly Satoshi cashed out. After failing to crack the $10,000 level, it seems prices are starting to pullback. With the exception that a Satoshi-era miner sold some Bitcoin, the news front has been rather quiet with the crypto space and lack of catalysts are likely to continue to weigh down on Bitcoin. If risk aversion gains traction, Bitcoin could be one of the first risky assets that gets dumped. It seems the rally that stemmed from newfound institutional interest is over.
Key Economic Releases and Events
Monday, May 25
- -US markets are closed for the Memorial Day holiday and UK markets are closed for the Spring bank holiday.
- 2:00am EUR German Q1 Final GDP Q/Q: -2.2%e v -2.2% prior; WDA Y/Y: -2.3%e v -2.3% prior
- 4:00am EUR German May IFO Business Climate: 78.3e v 74.3 prior; Expectations: 75.0e v 69.4 prior
- 3:00pm BOC Governor Poloz delivers the annual Hanson lecture via webinar
- 6:45pm NZD New Zealand Trade Balance data
- 7:50pm JPY Japan Apr PPI Services Y/Y: 1.2%e v 1.6% prior
Tuesday, May 26
- -Australian PM Morrison will address the National Press Club in Canberra.
- -Singapore’s parliament expected to announce a fourth stimulus package
- 7:00am Mexico Q1 Final GDP Q/Q: No est v -1.6% prior; Y/Y: No est v -1.6% prior
- 8:00am Hungary Central Bank Interest Rate Decision: Expected to keep Base Rate unchanged at 0.90%
- 10:00am US May Consumer Confidence: 87.0e v 86.9 prior
- 10:00am US Apr New Home Sales 490Ke v 627K prior
- 5:00pm RBNZ publishes six-monthly Financial Stability Report
- 5:00pm BOC’S Poloz, WilkinS speaking to Senate committee
Wednesday, May 27
- 1:00pm MXN Mexico central bank quarterly inflation report
- 2:00pm US Fed releases Beige Book
- 9:00pm NZD New Zealand May Final Business Confidence: No est v -45.6 prior
- 9:30pm AUD Australia Q1 Private Capital Expenditure: -2.8%e v -2.8% prior
Thursday, May 28
- 8:30am US Q1 Preliminary GDP Annualized Q/Q: -4.8%e v -4.8% advance; Personal Consumption: -7.4%e v -7.6% prelim
- 8:30am US Weekly Initial Jobless Claims: 2.00Me v 2.44M prior; Continuing Claims: No est v 25.1M prior
- 8:30am US Apr Preliminary Durable Goods Orders: -18.0%e v -14.7% prior
- 11:00am Crude Oil Inventories
- 11:00am FOMC Member Williams speaks
- 7:50pm Japan April Preliminary Industrial Production M/M: -5.4%e v -3.7% prior
- 7:50pm Japan April Retail Sales M/M: -6.8%e v -4.5% prior
- 9:30pm Australia April Private Sector Credit M/M: 0.5%e v 1.1% prior
Friday, May 29
- 2:45am France Consumer Spending M/M: No est v -17.9% prior
- 5:00am Eurozone May CPI Estimate Y/Y: 0.4%e v 0.4% prior
- 8:00am India Q1 GDP Y/Y: 1.0%e v 4.7% prior; GVA: 1.0%e v 4.5% prior
- 8:30am US April Personal Income: -7.0%e v -2.0% prior; Personal Spending: -12.6%e v -7.5% prior
- 8:30am Canada March GDP M/M: No est v 0.0% prior; Y/Y: No est v 2.1% prior
- 11:00am Fed Chair Powell takes part in a moderated virtual discussion
- Sovereign Rating Update: Ireland (S&P), Belgium (Moody’s) and Switzerland (Moody’s)
Saturday, May 30th
- 9:00pm China May Manufacturing PMI: 51.0e v 50.8 prior
