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Last week’s news

• Over the weekend, U.S. coronavirus epicentre New York appeared to be showing positive signs according to Governor Andrew Cuomo, reporting a decline in deaths and decline in the number of hospitalisations. Spain and the U.K. reported the lowest level of fatalities in weeks and Germany is now preparing itself for winding back lockdown restrictions. Singapore and Japan took this approach and had to re-impose restrictions, the market will be paying special attention to Europe’s evolution.
• French President Emmanuel Macron has warned of the collapse of the EU as a ‘political project’ unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic. He stated there is ‘no choice but to set up a fund that could issue common debt with a common guarantee’ to member states according to the needs, rather than their size. Macron’s ideas have already been opposed by Germany and the Netherlands arguing their taxpayers will be liable for other countries borrowings. Macron, who has always been an advocate of the E.U, believes that if priority is not given to member states in need, the E.U could crumble under the rise of populists, already arising in southern Europe.
• China officially released its first quarter GDP last week which came out at 6.8% year-on-year. The figure marks the first time China’s economy has shrank for more than 40 years after the coronavirus pandemic ended an era of uninterrupted growth dating back to the late 1970’s. The Chinese government only began reporting economic growth estimates in 1992 however the last time it officially acknowledged a year-on-year fall in output was for 1976. The release comes just after the IMF forecasted that this year will see the worst global economic contraction since the Great Depression of the 1930’s and losses in output would dwarf those suffered in the global financial crisis in 2008.
• Bank of England Governor Andrew Bailey gave his backing to an assessment by the British fiscal watchdog that output in the UK economy had plunged 35% since the coronavirus lockdown. When asked about the assessment he added ‘I don’t think there is anything implausible about a second quarter number of that nature’ indicating the Q2 could be just as bad for the UK as the first quarter. The UK announced last week that the current lockdown will be extended for a further 3 weeks and figures showed that a quarter of businesses in the UK have temporarily closed with more than half a million businesses reported to be in ‘significant distress’.

Looking ahead

• It does seem that the market has somewhat turned too optimistic especially given the high uncertainty, lack of current economic activity and negative economic outlook. Lockdowns seem to be working but infections are still much higher today than when countries decided to shut down. For now, it appears that a cure is the only hope to re-store pre-virus levels of economic activity. The market continues to play headlines in the short term, as such, volatility is still elevated. But it is hard to make predictions at this moment, as modelling the potential for re-infection seems difficult.
• The Brexit proxy EUR/GBP appears to be distorted considering the recent pandemic with Brexit headlines taking the backseat for now. It appears that the most likely outcome surrounding the proposed Brexit trade deal date with the E.U. will be postponed, delaying downside risk to the GBP. On the back of this we may see more favourable terms given to the U.K. as there is more time to negotiate and if the coronavirus fallout worsens, it is likely that the E.U. will not be in a position of power to delay negotiations further at the expense of an already fragile economy.

Key market events this week

• NZD Consumer Price Index YoY (Q1) – Monday
• Eurozone ZEW Survey (Economic Sentiment) (Apr) – Tuesday
• AUD Westpac Leading Index MoM (Mar) – Wednesday
• CAD Consumer Price Index (Mar) – Wednesday
• GBP Consumer Price Index YoY (Mar) – Wednesday
• EUR Markit Eurozone Manufacturing PMI (Apr) – Thursday
• GBP United Kingdom Sovereign Debt to be rated by S&P – Friday
• JPY Consumer Price Index (Mar) – Friday
• USD Durable Goods Orders (Mar) – Friday
• USD University of Michigan Consumer Sentiment Index (Apr) – Friday