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Last week’s news

• E.U leaders are still quarrelling over their proposed ‘recovery fund’, which is rumoured to be near €1.5 trillion. There are still large disagreements, member states such as Germany and the Netherlands who have so far dealt with the pandemic better are dubious of giving away ‘free money’ to their neighbours and believe they won’t ever have the ability to re-pay such debt whereas southern member states such as Spain are pushing for ‘grants’ rather than loans.
• US Banks seem to be pulling back from lending to European companies during the coronavirus pandemic, fuelling concerns Wall Street may be slowly diverting its funds to its home market, repeating a process that was last seen in the 08-09 financial crisis. The likes of JPMorgan, Bank of America and Goldman Sachs have all recently pulled out of large-scale talks with European companies over additional credit and lending facilities.
• The USD has been proving its resilience despite another 4.4million Americans filing for unemployment benefits. More than 26 million Americans have now filed for jobless claims since March. In the mid-term this and other economic drags could start debilitating the USD safe-haven status, assuming further FED easing is priced in. In the short term though, dependence from developing economies, uncertainty and liquidity are all helping the USD Index to hold above the 100 level. Overall, the US dollar index increased 0.6% over the last week and the Bloomberg U.S. dollar index increased 0.93% over the same period (the Bloomberg U.S. dollar index includes the Aussie dollar).
• Wall Street gained short-lasted hope last week after it was announced that a potential antiviral drug for coronavirus was being tested, however its first randomised clinical trial disappointed. The news initially strengthened the S&P 500 last week despite weak economic data, but the equity index ended the week almost flat as results of the trial were released.
• In Europe, the purchasing manager surveys hit new record lows last week, but the Euro was relatively supported by the ECB’s decision to lend more openly against junk collateral to support financial markets. European Central Bank President Christine Lagarde told EU’s leaders that the bloc’s gross domestic product could fall by as much as 15 percent and that they’ve done too little, too late. Lagarde has been a voiceful advocate of fiscal spending since last year.

Looking ahead

• Three central banks are hosting monetary policy meetings this week. Japan, U.S and the E.U will all discuss and decide on whether to keep their rates at the current level or adjust further. There is currently only a 10-15% chance of any of their rates changing.
• The Fed is expected to sit tight this Wednesday amid a debate on whether the U.S. is heading into a deflationary environment, despite the trillions of dollars of stimulus added to offset the impact of the pandemic. Market-based gauges, like the PCE deflator that’ll be released this week, will provide insights on how inflation is tracking against the Fed’s target. With crude oil at depressed levels and Fed’s commitment to do more as needed in response to the pandemic, US Treasury yields could be vulnerable to the downside. A correction in yields generally comes with a weaker USD, but that correlation is not static and can be overran by the USD’s safe-haven status, like what we saw in March.

Key market events this week

• Bank of Japan Interest Rate Decision – Tuesday
• US Consumer Confidence Index (Apr) – Tuesday
• AUD Consumer Price Index YoY (Q1) – Wednesday
• EUR German Consumer Price Index YoY (Apr) – Wednesday
• US Gross Domestic Product Annualised QoQ (Q1) – Wednesday
• US FOMC Interest Rate Decision – Wednesday
• CNH Manufacturing PMI (Apr) – Thursday
• Eurozone Consumer Price Index Core YoY (Apr) – Thursday
• Eurozone Gross Domestic Product YoY (Q1) – Thursday
• European Central Bank Interest Rate Decision – Thursday
• CAD Gross Domestic Product Annualised YoY (Feb) – Thursday
• USD PCE Core YoY (Mar) – Thursday
• CAD RBC Canadian Manufacturing PMI (Apr) – Friday
• USD ISM Employment & Manufacturing (Apr) – Friday