A mixed tone to markets last week saw the S&P fall 2.86% and the VIX Index, a measure of volatility, close below 35, although so far this morning it has spiked back up above that level. Meanwhile, the UST curve bull-flattened, with the yield on the 10-year closing 5bps lower over the week at 0.64%, and the 30-year rallied 9bps closing at 1.37%. Despite the risk-off tone at the end of last week and in Asia this morning, at time of writing, European stocks and US futures are positive and USTs are marginally higher. The resurgence of coronavirus particularly in the US, India and Brazil saw cases globally breach 10 million, we expect any negative virus news to lead to further risk-off action across markets this week.
Last week, the IMF slashed its estimates for global growth again, now estimating that global GDP will fall 4.9% in 2020, almost 2% below its April 2020 World Economic Outlook forecast. Moreover, the World Bank predicts that 90% of the 183 countries monitored globally will suffer a recession this year. On Friday ECB President Lagarde said the post-pandemic recovery is expected to be “restrained” adding that there will be a permanent change to part of the economy. Lagarde added that although we are over the worst of the virus crisis it will take some time for the “phenomenal” jump in household savings to filter back into spending and investment.
Over the weekend German Chancellor Merkel reinforced the importance ensuring “European economies start growing again”, adding “That’s why it’s important that we agree as quickly as possible on the new EU budget and recovery measures.” And ECB board member Schnabel cited that “inflation could remain at close to 0% well into the next year, and even negative inflation rates are possible”. In defence of the unprecedented ECB stimulus deployed she added that without new bond purchases, “we would probably have found ourselves by now in the middle of a severe financial crisis with unforeseeable consequences for the economy, employment and price and wage developments in the euro area.” Equity markets are clearly pleased with the unprecedented global stimulus deployed over the past three months and have priced in further support. Meanwhile, bond investor sentiment remains strong, a good example is last week's 100-year, 0.85% coupon issue from Austria; the EUR 2bn bond issued at a yield of 0.88% received orders above EUR 17bn.
Also last week, Oman’s one notch downgrade to Ba3 by Moody’s was not unexpected, the move brought the rating in-line with S&P’s BB- rating and one notch below Fitch’s BB ranking. We do not hold any Oman exposure, preferring instead to hold AA rated paper in GCC nations such as Abu Dhabi. Elsewhere, Canada was downgraded by one notch to AA+ by Fitch.
In what many will be happy to see the back of, this week will bring the end of H1’20. However, some things never change as concerns over the resurgence of coronavirus remain, the UK-EU trade talks resume, and US-China tensions remain a concern. Also of interest this week, Russians have begun voting for Putin’s constitutional reform which would allow him to stay in power potentially through to 2036, and give him the power to nominate top judges and prosecutors for approval by Russia's upper house of parliament. The Fed minutes from last month's meeting will also be released; no surprises are expected following the central bank’s decision to buy individual corporate bonds.
Today, US pending home sales, German CPI and Euro-Area consumer confidence readings may be of interest. Tuesday will see Fed Chair Powell and US Treasury Secretary Mnuchin testify before the House Financial Services Committee. Elsewhere, New York Fed President Williams will speak on central banking in the Covid-19 era. The ECB’s Schnabel and BOE Deputy Governor Jon Cunliffe will also speak on the webinar. Meanwhile BOE Chief Economist Andy Haldane will discuss the “The Second Quarter'' on another webinar. Data wise UK GDP, China PMI and Euro-area CPI readings will be released. Wednesday will see the US-Mexico-Canada Agreement take effect. Meanwhile, US ADP, ISM manufacturing prints, and Markit PMI readings from the US, Euro-area as well as China’s Caixin PMI readings may be of interest. With the US shut on Friday to celebrate Independence Day, the highlight on Thursday will be the US’ employment report for June. Data collection issues are expected to continue, thus affecting the true scale of unemployment, which the market expects will be at 12.4%, from May’s 13.3%. US factory orders and durable goods prints will also be followed on Thursday. A relatively quiet end to the week will see a number of composite and services PMI readings from the likes of China and the Euro-area.