Global stocks markets hit fresh 5-month highs this week on increasing optimism that human trials for both Gilead’s Remdesivir COVID treatment and AstraZeneca/ Oxford Uni vaccine are showing very promising results. Indeed, the Chair of the UK governments vaccine taskforce this week described the data as “fantastic – as good as it could have been at this stage”.
The team at Oxford University started vaccinating volunteers from April 23 and they have now immunised 9,000 in the UK and 1000 in Brazil and South Africa and something like 25,000 US citizens will be vaccinated soon.
They have been able to generate an immunity response, with the vaccination producing antibodies and also generating T-cells which is exactly what the Oxford team set out to achieve. So, the hope is that commercial quantities of vaccines could become readily available by mid next year.
However, the very sharp deterioration in relations between the US and China dragged on sentiment as the week wore on. The US closing the Chinese embassy in Houston marked a new front in the emerging “Cold War” and with US Sec of State Pompeo urging every leader of every nation” to “insist on … accountability from the Chinese Communist Party” it’s hard not to see relations hitting fresh post Tiananmen lows.
During periods of heightened geopolitical tension, the US$ often acts as something of a ‘safe haven’ There were no signs of that being the case this last week. Indeed, the US$ hit 2yr lows, as signs that the improvement in the labour market has started to stall with the virus ravaging states in the south and west and reopenings being wound back.
The US economy is hurtling towards ‘fiscal cliff’ which will mean amongst many other things that the last of the Pandemic Unemployment Insurance $600 cheques will be mailed to millions of former employees who have lost their jobs through no fault of their own this weekend.
The hope is that Senate Republicans and the President can agree on a path to extend the emergency jobless benefits though no agreement is yet forthcoming.
The news here in Australia was dominated by headlines of the “Harsh Reality” that the unemployment rate will hit 9.25% by the end of this year and could hit 10.75% depending how businesses “allocate available hours amongst existing employees versus hiring new workers” according to Australian Treasurer Josh Frydenberg.
That would be the highest unemployment rate in 26 years. The treasurer also forecast a budget deficit of $184.5bn in 2020/21 but Westpac’s Chief Economist Bill Evan s emphasised that the assumptions on the reopening of the Australian economy were the “most optimistic that you can have”, implying downside risks to the budget deficit forecasts given COVID cases in Victoria hitting fresh records.
Despite this news, the A$ surged to fresh 15 month high as the RBA Governor stated that “you can’t at the moment make the case [the Australian dollar] is misaligned” in his speech to the Anika Foundation on Tuesday.
Traders quickly took that signal to mark the A$ sharply higher, just as they did back in early June when the RBA policy statement noted that “it is possible that the depth of the downturn will be less than earlier expected” and the A$ then surged from just above 0.66 to 0.70.
Now next week will be dominated by the US Federal Reserve meeting which concludes Wednesday and will likely have a very dovish lean to it with good odds in favour of strengthened forward guidance as the Fed shifts from emergency support toward long term rehabilitation.
This could add to recent US$ weakness and with Q2 GDP forecast at an incredible -34% on an annualised basis on Thursday, the downside risks are clear.
After a busy week in Australia, next week we have Q2 CPI on Wednesday. Even though we expect a record fall for both headline & core measures it should draw limited attention, with weakness in prices not exactly top of the RBA’s concerns.
Event risk
US June durable, Japan Q1 CAPEX, China June Ind profits, Ger July IFO, RBA Asst Gov Fin Min Kent speaks at Kanga News event (Mon); FOMC outcome, AU Q2 CPI (Wed); US Q2 GDP, Germany Q2 GDP; AU June building permits, Alphabet, Amazon and Apple all report qtly earnings (Thu); China July PMI (Fri).
