Midweek Market Drivers: Global Expand Of COVID-19, Situation In Europe, and US-China Tensions

The number of new COVID-19 cases across the globe has exceeded 5 million.

How the situation is evolving in the European Union?

Aside from Spain, which has had 1 blip of over  1,000, we’ve seen the most adversely affected see sub-1,000 new cases each day for 9 consecutive days. The most affected being France, Germany, Italy, and Spain.

We had some concerns over how quickly governments were easing lockdown measures. When we factor in the 2-week incubation period, these numbers are fairly positive. They should give the markets some hope that a 2nd wave can be avoided.

Governments are about a 4-5 day period and about a week out to convince the more pessimistic…

If we look at China as a base case that should also be supportive.

We can then also look at virus vaccine news that has also been market positive late last week and early this week.

It appears that the coronavirus crisis continues to hit the global economy dramatically.

In the meantime, are there any improvements?

From the economic data, shifting through May and June numbers, the focus remains on employment and business and consumer confidence figures.

In Germany this week, we saw both business and consumer confidence improve, coming off the back the easing of lockdown measures.

The key, however, remains labor market conditions, which need to materially improve to drive confidence and consumption.

Expect these to be the key areas of focus and to drive the market near-term.

A pickup in consumption would drive a service sector recovery that would then filter through to the manufacturing sector.

Despite positive forecasts, the US-China conflict continues to be in the spotlight. Also, the Chinese government introduced a new HK Securities Law.

How did these events affect the markets?

There was some skepticism over the phase 1 trade agreement. We then saw accusations fly over the cause of the coronavirus pandemic leading to a deterioration in relations.

China has responded with the HK Securities Law and the U.S government is expected to respond in kind this week. This could include sanctions.

The markets have been almost Teflon in the early part of the week. On Wednesday morning, however, we saw risk appetite tested, as focus shifted back to the U.S – China tensions.

This shift in focus came as Trump announced that the U.S will respond to China’s plans for HK.

Let’s see what happens there. Beijing is not going to sit back this time around, not after the year-and-a-half that it took to come up with a phase 1 trade agreement.

Risk appetite will be tested. We do have COVID-19 news to keep the markets buoyed and there is also vaccine talk to provide support.

U.S China tensions, that relationship isn’t going to improve any time soon. Could you imagine a China-Russia alliance against the U.S and anyone else who wants to jump on Trump’s bandwagon?

That would certainly give the markets a rough time, particularly with Iran there in the Middle East as well.

It seems like the US-China tensions do not influence the markets significantly.

Meanwhile, is there anything else notable in regards to commodities and geopolitics?

Other than COVID-19, vaccines, and U.S China relations, there’s very little else to consider from a global financial market perspective.

There is one thing to consider, however, looking further down the track. Will the markets be as optimistic about the economic recovery once June stats begin to come out.

We saw May’s economic indicators show economic activity pickup from the depths of the abyss in April figures.

If we see June numbers fall off from May, then that optimism will come into question. May would have seen a larger pickup just due to the fact that economies were reopening.

I’m not convinced that the global economy will recover as quickly as the markets suggest. When you look at the equity markets and the rebound in the Aussie Dollar and Loonie. These are quite big moves when considering the doom and gloom ahead.

So, let’s see what happens when we begin to see June numbers…

For a look at all of today’s economic events, check out our economic calendar.

Asian Shares Mixed as Investors Await US Response to China’s Planned National Security Laws for Hong Kong

The major Asia-Pacific stock indexes finished mixed on Wednesday as unrest in Hong Kong over Beijing proposed national security laws weighed on global shares and oil prices, offsetting optimism about the re-opening of the world economy, as coronavirus containment measures are eased.

Riot police fired pepper pellets on protesters in Hong Kong’s main business district, rekindling concern about the protests seen last year that hit the territory’s economy. The major indexes were capped amid fears the protests would worsen tensions between the United States and China.

On Wednesday, Japan’s Nikkei 225 Index settled at 21419.23, up 148.06 or +0.70%. Hong Kong’s Hang Seng Index closed at 23301.36, down 83.30 or -0.36% and South Korea’s KOSPI Index finished at 2031.20, up 1.42 or +0.07%.

China’s Shanghai Index settled at 2836.80, down 9.74 or -0.34% and Australia’s S&P/ASX 200 Index finished at 5775.00, down 5.00 or -0.09%.

US Considering Sanctions Against China

U.S.-China relations will continue to remain in focus as worsening relations between the two superpowers could further curtail global business activity, which is already under pressure from the coronavirus pandemic. On Tuesday, U.S. President Trump said that he was preparing to take action against China this week over its effort to impose national security laws on Hong Kong.

Nikkei Pauses as Profit-Taking Hits Transport Stocks

Japan’s benchmark stock index, the Nikkei 225, paused on Wednesday after hitting a 2-1/2-month high in the last session, as investors locked in profits from recent strong gains in transport companies.

West Japan Railway dropped 3.3% and Central Japan Railway shed 2.6%, while ANA Holdings slipped 1.3% as investors moved to pocket profits from recent gains. All three had risen this week after Japanese Prime Minister Shinzo Abe on Monday lifted the coronavirus state of emergency in greater Tokyo and northern island of Hokkaido, ending the restrictions nationwide as businesses began to reopen.

China Stocks Fall on Rising Sino-US Tensions, Economic Worries

China stocks weakened on Wednesday as rising Sino-U.S. tensions and lingering worries over the coronavirus damage on the economy curbed risk appetite.

Traders reacted to the news that President Trump was preparing a strong response to China’s planned national security laws for Hong Kong by trimming long positions. Further selling was encouraged as investors monitored the pace of China’s economic recovery from the coronavirus crisis. Profits at the country’s industrial firms fell at a slower pace in April, but the economy faces persistent pressure as activity and demand remain weak.

Australia Shares Dip on Hong Kong Unrest; Banks Outshine

Australian shares eased lower on Wednesday as rising tensions in Hong Kong over China’s proposed security law took the shine off surging bank stocks and tempered expectations of a global economic recovery.

Financial stocks were the standout performers on the Australian benchmark as they firmed 5.3% and hit their highest level since March 16, after brokerage UBS said the sector would benefit from a faster-than-expected economic recovery.

For a look at all of today’s economic events, check out our economic calendar.

Fear is Still on Holiday

Equity markets have rebounded strongly. Nearly all the equity markets in the Asia Pacific region rose (India was a laggard) led by an almost 3% rally in Australia, which was seen as particularly vulnerable to the Sino-American fissure.

The Nikkei is approaching its 200-day moving average as it reached the best level since March 5. Europe’s Dow Jones Stoxx 600 is up around 1% after a 1.5% gain yesterday. It is at its best level since March 10.

The S&P 500 is set to gap sharply higher, above 3000, and its 200-day moving average for the first time since March 5. Benchmark 10-year bond yields are mostly firmer (US ~70 bp), but peripheral yields in Europe are softer, which is also consistent with the risk-on mood. Germany sold a two-year bond today with a yield of minus 66 bp and saw the strongest bid-cover in 13 years.

The dollar is heavy. Among the majors, the Antipodean and Norwegian krone lead the way. The yen is least favored and is struggling to gain in the softer dollar environment. Emerging market currencies are higher, led by more than 1% gains by the Mexican peso, South African rand, and Polish zloty. Gold is consolidating at softer levels (~$1725-$1735), while oil prices continue to recover. July WTI is probing the recent highs around $34 a barrel.

Asia Pacific

The risk-on mood has not been sparked by any sign of a thaw in the US-Chinese tensions. Indeed, the PBOC set the dollar’s reference rate against the yuan a little higher than the bank models suggested (CNY7.1293 vs. CNY7.1277). It was the second successive fix that was the highest since 2008. Still, the yuan snapped a three-day decline and rose less than 0.1%.

Legislation that makes it easier to crack down on dissent pressured Hong Kong, where the stock market fell more than 5.5% before the weekend, and forward points for the Hong Kong dollar exploded. The Hang Seng stabilized yesterday and gained more than 1.8% today. The 3-month and 12-month forward points are more than double what they were a week ago, but have eased from the extreme readings before the weekend. The situation is far from resolved despite the market moves.

The focus in Japan is on the government’s second supplementary budget for nearly JPY1 trillion. It could be approved by the Cabinet as early as tomorrow and would nearly double the government’s efforts. Japan is lifting the national state of emergency.

The dollar is firm against the yen but held just short of JPY108.00 (last week’s high was ~JPY108.10). There is an option for a little more than $400 mln struck at JPY107.90 that expires today. The market looks poised to challenge the highs in North America today. Note that the 200-day moving average is found near JPY108.35, and the greenback has not traded above it since mid-April.

The Australian dollar is punching above $0.6600 and is at its best level since March 9. Its 200-day moving average is found near $0.6660. The dollar peaked against the Chinese yuan at the end of last week near CNY7.1437. It rose against the offshore yuan on the same day near CNH7.1646, just below the high set on March 19.

Europe

The EU responded to Germany’s proposal to take at least a 20% equity stake (~9 bln euros) in Lufthansa by requiring it to give up some slots at airports in Frankfurt and Munich. Meanwhile, the larger focus is on the EC’s proposal for a recovery plan now that the German-French proposal has been countered by Austria, Denmark, Sweden, and the Netherlands.

However, the basis for a compromise does appear to exist in the form of some combination of grants, loans, and guarantees and in terms of access. With the European Stabilization Mechanism and the European Investment Bank issuing bonds for which there is a collective responsibility, we are not convinced that an EU bond is a step toward mutualization of existing debt or a fiscal union. In fact, such claims do little more than antagonize the opposition.

The ECB’s Pandemic Emergency Purchase Program (PEPP) has spent a little more than a quarter of its 750 bln euro facility in the first two months. Hints from some officials suggest that this could be expanded as early as next week when the ECB meets. At the current pace, PEPP will be out of funds toward the end of Q3 or early Q4. Talk in the market is that a 250-500 bln euro expansion is possible.

The political controversy of UK’s Cummings violation of the lockdown seems to have little impact for investors. Sterling, the worst performing of the major currencies this month, is bouncing back smartly today, and while the UK stock market was closed yesterday, it is playing a little catch-up today. The benchmark 10-year Gilt yield is a few basis points higher, but faring better than German Bunds and French bonds (where the 10-year yield is now back into positive territory, albeit slightly).

The euro has bounced a full cent from yesterday’s low near $1.0875. The market has its sights on last week’s high just shy of $1.1010 and the 200-day moving average a little above there. The euro has not traded above its 200-day moving average since the end of March. Above there, the $1.1065 area corresponds to about the middle of this year’s range. Sterling is near its best level in a couple of weeks.

After finding support near $1.2160 in the past two sessions, it bounced to about $1.2325 today to toy with the 20-day moving average (~$1.2315). The short-covering rally has stretched the intraday technical readings, and it may be difficult for the North American session to extend the gains very much before some consolidation.

America

The US reports some April data (Chicago Fed’s National Economic Activity Index) and new home sales. The reports typically are not market-movers even in the best of times. Moreover, it is fully taken on board that the economy was still imploding. May data is more interesting. The Dallas Fed’s manufacturing survey and the Conference Board’s consumer confidence surveys will attract more attention and are expected to be consistent with other survey data suggesting the pace of decline is moderating. This is thought to be setting the stage for a recovery in H2.

Canada’s economic diary is light today, and Mexico is expected to confirm that Q1 GDP contracted by 1.6%. Yesterday Mexico surprised by with a nearly $3.1 bln trade April deficit. The median forecast in the Bloomberg survey was for a $2 bln trade surplus. Apparently, none of the economists surveyed expected a deficit. Exports fell by nearly 41%, and imports tumbled by 30.5%. Many economists are revising forecast for Mexico’s GDP lower toward a double-digit contraction this year.

Nevertheless, the peso is flying. It is the strongest currency here in May. The 1.75% gain today brings the month’s advance to a dramatic 9%+ gain. The US dollar is near MXN22.10, giving back about half of this year’s appreciation. A break of the MXN22.00 area would target the MXN21.30 area.

The intraday momentum indicators are stretched. The US dollar is heavy against the Canadian dollar as well. It is approaching the lower end of its two-month trading range near CAD1.3850. The next important chart point is around CAD1.3800. Here too, the greenback’s slide in Asia and Europe is leaving intraday technicals indicators stretched as North American dealers resume their posts.

For a look at all of today’s economic events, check out our economic calendar.

Asian Shares Higher as Investors Focus on the COVID-19 Economic Recovery, Rather than US-China Tensions

The major Asia-Pacific stock indexes closed higher on Monday, however, the trade was largely subdued, after China’s move to impose a new security law on Hong Kong heightened concerns about the future stability of the city and global trade prospects. Volume was light with the U.S. stock market closed due to the Memorial Day holiday.

On Monday, Japan’s Nikkei 225 Index settled at 20741.65, up 353.49 or 1.73%. Hong Kong Hang Seng Index closed at 22952.24, up 22.10 or +0.10% and South Korea’s KOSPI Index finished at 1994.60, up 24.47 or 1.24%.

China’s Shanghai Index settled at 2817.97, up 4.20 or +0.15% and Australia’s S&P/ASX 200 index closed at 5615.60, up 118.60 or +2.16%.

Hong Kong Residents Protest

Investors were rattled on Friday when Beijing unveiled details of the security legislation that critics see as a turning point for the former British colony.

The proposal drew the ire of Hong Kong residents who defied social distancing rules and protested on streets while the United States warned China’s move could lead to U.S. sanctions.

The U.S. Commerce Department responded by adding 33 Chinese companies and other institutions to a blacklist for human rights violations and to address U.S. national security concerns, Reuters reported.

China Threatens to Take Action if US Undermines Its Interests in Hong Kong

China warned on Monday that it will take countermeasures if the United States insists on undermining its interests regarding Hong Kong, following the latest comments from Washington about possible sanctions over new national security legislation for the city.

Chinese foreign ministry spokesman Zhao Lijian told reporters during a briefing that the United States is trying to harm China’s national security and said Beijing has lodged stern representations with Washington over White House National Security Adviser Robert O’Brien’s comments that the security law for Hong Kong could lead to U.S. sanctions.

National Security Adviser O’Brien said on NBC’s “Meet the Press” Sunday that the U.S. government will likely impose economic sanctions on Hong Kong and China if Beijing moves ahead with a proposed national security law for Hong Kong that could constrain the special region’s autonomy.

Japan’s Nikkei Jumps on Fresh Stimulus Hopes

Japan’s Nikkei jumped 1.7% after the Nikkei newspaper reported the country was considering a fresh stimulus package worth more than $929 billion that will consist mostly of financial aid programs for companies hit by the coronavirus pandemic.

In other news, Prime Minister Shinzo Abe will lift the state of emergency for the coronavirus pandemic in Tokyo and four other prefectures on Monday, Kyodo News reported. It added that Abe is expected to hold a press conference to explain his government’s plan, which would ease restrictions on economic activity.

Australian Shares Jump to 11-Week High as Travel Stocks Rebound from Coronavirus

Australian shares jumped to their highest value in almost three months as optimistic investors focused on the COVID-19 economic recovery, rather than US-China tensions.

Travel stocks skyrocketed after Treasury Josh Frydenberg raised the possibility that more stimulus could be on the way for the ailing sector.

“The tourism sector could be one sector in need of further support,” he told ABC News Breakfast. “That’s what we’ll look at in the context of the economic situation at the time. You’ll continue to see our international borders closed for some time.”

For a look at all of today’s economic events, check out our economic calendar.

Hong Kong Stocks Drop More than 5% as Beijing Pushes Security Law

The major Asia-Pacific stock indexes all finished sharply lower on Friday as tensions between the United States and China escalated. Hong Kong’s benchmark, the Hang Seng Index led the selling among the region’s major markets.

The tensions between the U.S. and China centered on the former’s imposition of a new national security law on Hong Kong after months of anti-government protests in the Chinese-ruled city. Tensions between Beijing and Washington have risen in recent days, over issues such as the coronavirus pandemic as well as a bill that was passed which could force Chinese firms to delist on U.S. exchanges.

On Friday, Japan’s Nikkei 225 Index settled at 20388.16, down 164.15 or -0.80%. Hong Kong’s Hang Seng Index finished at 22952.03, down 1328.00 or -5.47% and South Korea’s KOSPI closed at 1970.13, down 28.18 or -1.41%.

In China, the Shanghai Index settled at 2813.77, down 54.16 or -1.89% and in Australia, the S&P/ASX 200 finished at 5497.00, -53.40 or -0.96%.

Hong Kong

China is getting ready to impose a new security law that has sparked concerns that Beijing is tightening its grip on Hong Kong, and there are worries it could trigger another wave of pro-democracy protests.

The draft law was announced at the annual National People’s Congress (NPC), the Chinese parliament, which kicked off on Friday. The laws would reportedly ban secession, foreign interference, terrorism and all seditious activities aimed at toppling the central government and any external interference in the former British colony, according to Reuters.

China

Chinese stocks dropped on Friday, wrapping up their worst week since March, as concerns over economic growth and renewed tensions with the United States following a new national security law in Hong Kong dented investor sentiment.

China refrained from setting a 2020 GDP growth target and pledged to step up spending and financing to support its economy, the first time that the Asian country did not set a gross domestic product (GDP) goal since 1990 when the government started to publish such targets, according to Reuters.

Khiem Do, head of Greater China Investments at Barings, said short-term traders were mostly concerned with the absence of a growth on Friday. “The market was hoping they would give some kind of number, 2% or 3%, but that wasn’t available.”

Japan

Japanese shares fell on Friday, as risk sentiment was hit after China’s plans to impose a new security legislation on Hong Kong fueled worries over Sino-U.S. tensions. The move drew a warning from U.S. President Donald Trump, who said the United States would react “very strongly” against it.

Highly cyclical mining, sea transport and iron and steel were the three worst-performing sector sub-indexes on the main bourse.

Investors largely shrugged off the Bank of Japan’s decision to launch a new lending facility that aims to channel more funds to small and mid-size businesses suffering from the pandemic, which came as no surprise, according to analysts.

Asia-Pacific Shares Weaken After WHO Reports Record Rise in COVID-19 Cases

The major Asia-Pacific stock indexes finished mixed, but mostly lower on Thursday with South Korea coming out the lone winner for the session. The trade was a little tentative as investors continued to digest the data from the reopening of global economies amid the coronavirus pandemic.

The World Health Organization said the number of newly reported cases globally hit a daily record this week, amid authorities around the world attempting to ease lockdown measures put in place to curb the virus’ spread.

On Thursday, Japan’s Nikkei 225 Index settled at 20552.31, down 42.84 or -0.21. Hong Kong’s Hang Seng Index finished at 24280.03, down 119.92 or -0.49% and South Korea’s KOSPI Index closed at 1998.31, up 8.67 or +0.44%.

China’s Shanghai Index settled at 2867.92, down 15.81 or -0.55% and Australia’s S&P/ASX 200 Index closed at 5550.40, down 22.60 or -0.41%.

Absent from the trade on Thursday was the euphoria fueled on Monday after Moderna announced a positive development for a potential coronavirus vaccine. This is because on Wednesday, a STAT News report said vaccine experts were skeptical of Moderna’s new vaccine data. In response to the report, Moderna’s CEO said the company would never put out data that was different from “reality.”

Australian Stock Market

Australia made the deepest dividend cuts globally this year, with more than $6 billion deferred or cancelled as companies conserve cash to ride out the coronavirus, turning foreign investors wary of the country’s normally high-yielding firms, according to Reuters.

Payout changes have been announced over the past two months and strategists believe more are coming as companies sign off annual accounts on June 30.

Financials comprise more than a quarter of the benchmark stock price index and, under pressure to demonstrate stability to regulators, account for the steepest cuts.

Hong Kong Stock Market

Hong Kong stocks slipped on Thursday, dragged down by technology shares, after U.S. officials said regulators were open to making changes to close a possible loophole in a new rule aimed at curbing global chip sales to Chinese firm Huawei Technologies.

A U.S. State Department official said the rule, which currently includes chips designed by Huawei and doesn’t cover shipments if they are sent directly to the company’s customers – will be watched by regulators and “certainly make any changes that we think are necessary.”

Investors also awaited China’s parliamentary meeting, where Premier Li Keqiang is expected to make a state-of-the-nation style address and reiterate Beijing’s long-standing vow to keep the Yuan stable.

Japan Stock Market

Japan’s Nikkei share average snapped a four-day winning streak on Thursday, as investors were reluctant to chase markets after the benchmark hit a 2-1/2-month high, raising concerns that stocks were potentially overvalued.

Although the market has rallied on hopes of a quick economic recovery following countries’ move to ease coronavirus restrictions, investors have noted the market’s valuations are getting stretched, according to Reuters.

The Japanese government is expected to lift its state of emergency later in the day in three prefectures around Osaka, the country’s second-biggest urban area after Tokyo, and might take similar steps for Tokyo by the end of the month.

The Invisible Ceiling for The Markets

The positive dynamics of the last days or the figures of the monthly increase in exchange prices should not be misleading. Many assets are still bumping into the glass ceiling – more and more investors prefer to close purchases and look around for new signals.

Futures on S&P 500 reached the level of 2981 – the highest since March 6, but this morning it rolled back to 2913, losing 2.2% from the intraday peak. Japanese Nikkei225 is also facing an increase in sales. Even more noticeable are the difficulties of the EUROStoxx50 index, which since the beginning of April has hardly left the 1.25% range.

At first glance, Oil seems even better, having added 80% for the month to $36 per barrel of Brent on the spot market. But here too, sales increased as we approached April peak.

On Monday afternoon, markets showed more than 3% rally, with Oil growing three times stronger on reports of successful testing of the Moderna vaccine. However, this test on eight healthy people will be followed by a new phase with 600 volunteers. And if all goes well, we will get a vaccine by the end of 2020. It’s too long away and too uncertain to launch sustainable purchases in the markets right now.

But even if we move away from the medical topic, company reports show a very mixed picture. Walmart has managed to find the right balance between online retailing and partial shop operations. Many others fare much worse. J.C. Penney started a bankruptcy procedure, while many other retailers are experiencing a double-digit revenue drop compared to last year. Quarantine measures will accelerate the retail apocalypse that has been reported since 2018 in the U.S.

Trendy clothing stores in Europe have already opened in most countries, but without tourists, they are losing their customer base. Thus, the economic recovery can only be seen in comparison with previous weeks – it’s growth from a low base. Attempts to increase asset prices outside the crisis areas are probably doomed to stumble upon increased sales.

Investors should keep monitoring how income and dividends in companies change as quarantine restrictions are lifted. In our view, so far, all negative is pegged to quarantine, but retail sales in China and the behavior of commodity prices suggest that the bottom point for the markets is yet to come.

by Alex Kuptsikevich, the FxPro senior market analyst.

Asia-Pacific Stock Indexes Chase Wall Street’s Gains; Japan’s Nikkei Hits Two-Month High

The major Asia-Pacific stock indexes extended gains on Tuesday, following the lead of Wall Street, as more countries emerged from their economic lockdowns and a successful early-stage trial of a coronavirus vaccine drove sentiment.

Data from Moderna Inc.’s COVID-19 vaccine, the first to be tested in the United States, showed it produced protective antibodies in a small group of healthy volunteers. This news boosted sentiment as investors wagered on a faster-than-expected economic recovery.

On Tuesday, Japan’s Nikkei 225 Index settled at 20433.45, up 299.72 or +1.49%. Hong Kong’s Hang Seng Index finished at 24388.13, up 453.36, up 1.89% and South Korea’s KOSPI Index closed at 1980.61, up 43.50 or +2.25%.

In China, the Shanghai Index settled at 2898.54, up 23.16 or +0.81%. Australia’s S&P/ASX 200 Index finished at 5559.50, up 99.00 or +1.81%.

Analysts Still See Headwinds and Risks

Despite the robust investor sentiment, analysts expect a steep contraction in world growth with the outlook for 2021 still uncertain with no approved treatments or vaccines for COVID-19 currently. Healthcare experts predict a safe and effective vaccine could take 12 to 18 months.

“I hope…we find the vaccine in record time and everything is rosy again but the underlying reality is still very shaky,” Hugh Young, managing director for the Asia Pacific region at Aberdeen Standard Investments, told CNBC’s “Street Signs” on Tuesday.

Commenting on the market rally following that positive development from Moderna, Young said: “It might well have legs short-term but I think the reality that we’re going to see over coming weeks is the effect on corporate earnings and corporate health. The second quarter this year is going to be pretty terrible for economies worldwide…and for most corporates.”

Analysts at Perpetual wrote in a note, “It may be the case that central bank liquidity is chloroforming markets to overlook risks such as overleveraged corporate and government balance sheets, growing COVID-19 case numbers, growth holes and a slow recovery path.”

Japanese Stocks Hit 2-1/2 Month High

Japanese stocks advanced in line with their Wall Street and Asian peers and hit a two-and-a-half month high on Tuesday on hopes for a swift reopening of the global economy. Highly cyclical iron and steel, sea transport and insurance were the top three performing sectors on the main bourse.

China’s Xi Pledges $2 Billion to Help Fight Coronavirus

Chinese President Xi Jinping said Monday his country will provide $2 billion over two years to help other countries respond to the impact of the coronavirus pandemic.

“China will provide 2 billion U.S. dollars over two years to help with COVID-19 response, and with economic and social development in affected countries, especially developing countries,” Xi said, according to an official English translation.

Asian Shares Firm on Hopes of Global Recovery; Japanese Economy Contracted

The major Asia-Pacific stock indexes closed up on Monday but little changed as oil prices hit a five-week high as more countries re-opened their economies, stirring hopes the world was nearer to emerging from recession. The major markets were also supported by comments from U.S. Federal Reserve Chairman Jerome Powell who said the economy stateside may need a coronavirus vaccine to fully recover and a jump in U.S. stock index futures.

On Monday, Japan’s Nikkei 225 Index settled at 20133.73, up 96.26 or +0.48%. Hong Kong’s Hang Seng Index finished at 23918.15, up 120.68 or +0.51% and South Korea’s KOSPI Index closed at 1937.11, up 9.83 or +0.51%.

China’s Shanghai Index settled at 2875.42, up 6.96 or +0.24% and Australia’s S&P/ASX 200 Index finished at 5460.50, up 55.70 or +1.03%.

Growing Optimism as More Countries Lift Restrictions but Risks Remain

Summer weather is enticing much of the world to emerge from coronavirus lockdowns as centers of the outbreak from New York to Italy and Spain gradually lift restrictions that have kept millions cooped up for months. However, there remain risks from opening up too early.

“The economies of Europe and the U.S. likely bottomed out in April and are slowly starting to come back to life,” wrote Barclays economist Christian Keller in a note.

“However, incoming data from most economies highlight the depth of the contraction, raising risks of longer-term scarring that might undermine the recovery.”

Oil Prices Rise Ahead of June WTI Contract Expiry

Crude oil prices climbed by more than $1 a barrel on Monday, supported by output cuts and signs of a gradual recovery in demand amid easing coronavirus curbs, with U.S. oil showing no signs of last month’s contract expiry price rout that drove prices below $0.00 for the first time in history. Asian traders saw this as a good sign for the global economy because it indicates demand may be picking up.

Powell Sees Need for More Government Aid

Late Sunday (local time), Federal Reserve Chairman Jerome Powell took a cautious line in an interview saying a U.S. recovery may stretch deep into next year and a full comeback might depend on a coronavirus vaccine.

Powell also outlined the likely need for three to six more months of government financial help for firms and families. Talk of additional government stimulus also helped boost gold prices over 1% to their highest level since 2012.

Japanese Investors Show Little Reaction as Economy Enters Recession

Japan’s economy slipped into recession for the first time in 4-1/2 years in the last quarter, putting the nation on course for its deepest postwar slump as the coronavirus crisis ravages businesses and consumers.

Analysts polled by Reuters estimate Japan’s economy will shrink an annualized 22.0% in the current quarter, which would be a record decline, with pressure on output intensifying after Prime Minister Shinzo Abe in April declared a nationwide state of emergency amid the widening pandemic.

Asian Shares Weaker on COVID-19 Flare-Up Fears, Tense U.S.-China Relations

The major Asia-Pacific stock indexes finished the week lower with the exception being the Australian market which posted a marginal gain. Stocks were primarily weighed down as deteriorating U.S.-China relations added to uncertainties over how fast economies can recover as they start to emerge from lockdowns.

Worries about confrontations between the two largest economies in the world eclipsed Chinese economic data, which showed its economy is gradually recovering from the shock of the coronavirus outbreak, according to Reuters.

Investors also said that optimism from the reopening of economies has also been marred by fears of a second wave of infections, encouraging profit taking. Additionally, Fed Chairman Powell’s warning of a possible deeper and longer recession without additional fiscal stimulus dampened risk appetite.

Last week, Japan’s Nikkei 225 Index settled at 20037.47, down 141.62 or -0.70%. South Korea’s KOSPI finished at 1927.28, down 18.54 or -0.95% and Hong Kong’s Hang Seng closed at 23797.47, down 432.70 or -1.79%.

China’s Shanghai Index settled at 2868.46, down 26.88 or -0.93% and Australia’s S&P/ASX 200 Index finished at 5404.80, up 13.70 or +0.25%.

Analysts Worried about Rising U.S.-China Tensions

While many analysts regarded last week’s weakness as a natural correction after a spectacular rally since mid-March, they have become increasingly worried about rising U.S.-China tensions. U.S. President Donald Trump blames China for its handling of the COVID-19 disease that has killed more than 85,000 American, according to Reuters.

Trump signaled a further deterioration of his relationship with China by saying he has no interest in speaking to President Xi Jinping right now.

The President went on to suggest he could even cut ties with the world’s second-largest economy, a day after the U.S. federal pension fund delayed investment in Chinese shares in the wake of pressure from the White House.

The move fanned fears the confrontation between Washington and Beijing could escalate beyond trade to finance and other areas.

On Friday, the Trump administration moved to block global chip supplies to blacklisted telecoms equipment company Huawei Technologies, spurring fears of Chinese retaliation and hammering shares of U.S. producers of chipmaking equipment.

Chinese Economic Data Mixed

China’s inflation for April released by the country’s National Bureau of Statistics missed expectations. The consumer price index for April rose 3.3% year-on-year, versus expectations of a 3.7% increase in a Reuters poll. Meanwhile, China’s producer price index for April declined 3.1% year-on-year, as compared to a 2.6% fall expected in a Reuters poll.

China’s industrial output in April rose 3.9% from a year earlier, exceeding expectations for a 1.5% rise and expanding for the first time this year as its economy slowly emerges from its coronavirus lockdown. But retail sales remained weak as unemployment rose.

Toyota Operating Income Declines

In corporate earnings, Japanese automaker Toyota posted a 1% year-on-year decrease in its operating income for the 2020 fiscal year. In particular, the firm also forecast a 79.5% year-on-year plunge in its operating income for the 2021 fiscal year.

Foreign Investors Sold Japanese Stocks Every Week in Past 3 Months

Foreign investors sold a net 133.9 billion yen ($1.25 billion) of Tokyo shares last week, data from Japan Exchange Group showed on Thursday, marking the 13th consecutive week of selling, the longest on record, Reuters reported.

The Week Ahead – Geopolitics, Central Bank Minutes, and Economic Data in Focus

On the Macro

It’s a busy week ahead on the economic calendar, with 60 stats in focus in the week ending 15th May. In the week prior, 61 stats had been in focus.

For the Dollar:

It’s another relatively busy week ahead for the greenback.

It’s a quiet first half of the week, however, with economic data limited to April housing sector numbers.

The markets are now looking for a May pickup in economic activity. We can, therefore, expect building permits and housing start numbers to have a muted impact on risk sentiment.

Mortgage applications have been on the rise since mid-April, which is positive.

Economic data on Thursday will garner plenty of attention, however.

May’s Philly FED Manufacturing Index, prelim private sector PMIs and weekly jobless claims figures will be of particular interest.

May numbers will give the markets an idea of what impact, if any, the initial easing of lockdown measures have had… May’s service sector PMI will likely be the key driver alongside the weekly jobless claims figures.

With no material stats due out on Friday, Thursday is the main event for the Greenback.

On the monetary policy front, the FOMC meeting minutes on Wednesday will also influence. FED Chair Powell had weighed on risk appetite last week. The minute will likely deliver a similar theme.

Outside of the numbers, expect COVID-19 updates and any further increased tension between the U.S and China to also influence risk sentiment and Dollar demand…

The Dollar Spot Index ended the week up by 0.67% to 100.402.

For the EUR:

It’s a busy week ahead on the economic data front.

In the 1st half of the week, May ZEW Economic Sentiment figures for Germany and the Eurozone are due out.

Will there be any pickup in sentiment or a reversal? Economists and Analysts seemed a little over-optimistic in the April report…

The markets will then need to look ahead to consumer confidence figures on Wednesday and May’s prelim private sector PMIs on Friday.

There will need to be a marked slowdown in the pace of contraction across the private sector to deliver any major upside for the EUR…

Germany and the Eurozone’s numbers will have the greatest influence on the day.

Outside of the numbers, EU Finance ministers are due to meet virtually in the early part of the week. Progress in delivering a sizeable COVID-19 stimulus package would be a boost…

The EUR/USD ended the week down by 0.18% to $1.0820.

For the Pound:

It’s another particularly busy week ahead on the economic calendar.

In the 1st half of the week, employment and inflation figures are due out on Tuesday and Wednesday.

Expect April’s claimant count and the annual rate of inflation to have the greatest impact on the Pound.

The markets will then need to wait for May prelim private sector PMIs and April retail sales figures on Thursday and Friday.

Expect the Pound to be sensitive to the numbers in the week ahead.

Outside of the numbers, Brexit chatter and COVID-19 updates will also be key drivers in the week.

The GBP/USD ended the week down by 2.37% to $1.2116.

For the Loonie:

It’s another relatively quiet week ahead on the economic calendar.

April inflation figures on Wednesday and March retail sales figures on Friday are the key drivers.

Neither set of numbers will have a material impact on the Loonie, however. Retail sales were likely to be on the weaker side and inflationary pressures were likely non-existent in April.

Expect market risk sentiment and the direction of crude oil prices to be key in the week ahead.

The Loonie ended the week down by 1.31% to C$1.4109 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a particularly quiet week ahead.

There are no material stats due out, leaving the Aussie in the hands of commodity prices in the week.

On the monetary policy front, the RBA meeting minutes will garner some interest on Tuesday. Any suggestions of a further need for support would add further pressure on the Aussie Dollar.

Over the week, the market focus will be on the COVID-19 numbers. A continued easing of lockdown measures would be Aussie Dollar positive. Tensions between the U.S and China, however, would likely overshadow any positive sentiment, however.

The Aussie Dollar ended the week down by 1.82% to $0.6413.

For the Kiwi Dollar:

It’s a relatively quiet week ahead on the economic data front.  Key stats include 1st quarter wholesale inflation figures on Tuesday and retail sales figures on Friday.

Expect the 1st quarter numbers to have a limited impact on the Kiwi Dollar in the week.

Following the RBNZ policy decision last week, much will depend on the easing of lockdown measures. Not just in New Zealand but also across key trading partners…

A rise in tension between the U.S and China, however, would offset the effects of easing lockdown measures.

The Kiwi Dollar ended the week down by 3.28% to $0.5935.

For the Japanese Yen:

It’s a busy week ahead on the economic data front.

1st quarter GDP numbers set the tone on Monday, ahead of March industrial production figures on Tuesday.

The focus will then shift to April trade data on Thursday.

With the BoJ having made its move, the GDP and trade figures will likely have limited influence.

The markets will get a sense of just how bad things were, however.

Outside of the numbers, the Yen could find support should there be any jump in new COVID-19 cases in the U.S.

With the Japanese government removing emergency measures, the Yen could find support, particularly with troubles brewing between the U.S and China.

The Japanese Yen ended the week down by 0.38% to ¥107.06 against the U.S Dollar.

Out of China

It’s a quiet week ahead on the economic data front, with no material data due out in the week.

The market focus will remain on COVID-19 news and any rise in tension with the U.S…

On the monetary policy front, the PBoC is expected to leave loan prime rates unchanged on Wednesday. Chatter from Beijing of support would be needed, however, to mute the effects of a hold.

The Chinese Yuan ended the week down by 0.39% to CNY7.1019 against the U.S Dollar.

Geo-Politics

UK Politics:

Brexit, U.S – UK trade talks and lockdown measures are the key areas of focus in the week ahead.

Last week, we saw the Pound take a hit. Not only were government plans to ease lockdown measures disappointing, but Brexit news also weighed.

The EU’s plans to take the UK to court over its failure to deliver freedom of movement was another negative.

A lack of progress and a clear breakdown in relations doesn’t bode well for a trade agreement…

From the weekend, there was nothing positive for the Pound to find support from.

U.S Politics:

Rising tensions between the U.S, stemming from the U.S government’s plans to block chip deliveries to Huawei points to choppy waters ahead.

Trump appears to have jumped the gun and thrown the likes of Apple Inc. under the bus.

Corporate America will have some issues with the latest attack that would not only push production out of China but eat into a sizeable market in terms of revenue.

Another round of stimulus may not be enough to offset the likely effect of another U.S – China trade war.

The Coronavirus:

Easing measures will continue in the week and Trump has continued to state that easing measures will continue at all costs.

We’ve yet to see a marked increase in the number of COVID-19 numbers across the U.S, though concerns will linger over what lies ahead.

From the market’s perspective, there are 3 key considerations that remain:

  1. Progress is made with COVID-19 treatment drugs.
  2. The downward trend in new coronavirus cases continues.
  • Governments continue to progress with the easing of lockdown measures.

All of this will need to translate into a marked decline in jobless claims and a pickup in consumer confidence and consumption… We’ve yet to see any of this…

At the time of writing, the total number of coronavirus cases stood at 4,722,233, with the U.S reporting 1,507,773 cases to-date.

Asia-Pacific Shares Finish Week Lower on Escalating US-China Tensions

The major Asia-Pacific stock indexes closed mixed on Friday as investors showed limited reaction to data that showed China’s industrial output bounced back more than expected in April.

China’s industrial output rose 3.9% year-on-year in April, according to data released Friday by the country’s National Bureau of Statistics. That marked the first expansion in the metric for this year from China. Analysts in a Reuters poll had expected industrial output for April to rise 1.5%. Retail sales, however, fell 7.5% in April. That was a larger fall than the 7% decline forecast, according to Reuters.

On Friday, Japan’s Nikkei 225 Index settled at 20037.47, up 122.69 or +0.62%. Hong Kong’s Hang Seng Index finished at 23797.47, down 32.27 or -0.14% and South Korea’s KOSPI Index closed at 1927.38, up 2.32 or +0.12%.

In China, the Shanghai Index settled at 2868.46, down 1.88 or -0.07% and Australia’s S&P/ASX 200 Index finished at 5404.80, up 76.10 or +1.43%.

In other news from China, Fixed Asset Investment fell 10.3%, worse than the -9.8% forecast. Retail Sales fell 7.5%. Economists predicted a 5.9% loss. The Unemployment Rate came in at 6.0%. The estimate was 5.8%.

US-China tensions Rattle Sentiment

Asian shares may have finished mixed on Friday, but closed the week lower as deteriorating U.S.-China relations added to uncertainties over how fast economies can recover as they start to emerge from lockdown.

Worries about confrontations between the two largest economies in the world eclipsed Chinese economic data, which showed its economy is gradually recovering from the shock of the coronavirus outbreak.

With China the first to relax lockdowns, global investors are closely watching it for clues on how long demand will take to bounce back, as other countries begin to ease their own anti-virus measures.

Investors are becoming increasingly worried about rising U.S.-China tensions. U.S. President Donald Trump blames China for its handling of the COVID-19 disease that has killed more than 85,000 Americans.

Trump signaled a further deterioration of his relationship with China by saying he has no interest in speaking to President Xi Jinping right now.

He went so far as to suggest he could even cut ties with the world’s second-largest economy, a day after the U.S. federal pension fund delayed investment in Chinese shares in the wake of pressure from the White House.

The move fanned fears the confrontation between Washington and Beijing could escalate beyond trade to finance and other areas.

“The U.S.-China trade war was the biggest theme for markets last year. It will be a big concern if the conflict escalates beyond trade,” said Takeo Kamai, head of execution at CLSA.

Economic Data and Central Bank Commentary Is Coming Back into Focus

As the markets enter the mid-way point of the 2nd quarter, risk appetite has come under pressure once more.

The coronavirus pandemic allowed the global financial markets to brush aside some quite dire economic data of late. It was justifiable to a point, which has now passed…

We saw record low private sector PMIs, the largest increases in jobless claims, and more.

In fact, April stats were the worst on record across the board and, while the U.S economic contraction may not have been as severe as the Great Depression, things are not looking much better for the 2nd quarter.

So, as we pass through to May stats, the markets will likely be far more sensitive to the economic calendar.

Unfortunately for the more bullish, FED Chair Powell tempered market expectations on Wednesday.

The U.S government now needs to find a difficult balance to reignite the U.S economy.

On the one hand, lockdown measures need to ease at a quick enough pace to drive rehiring. There is another issue that the government does have to consider, however.

The U.S, alongside other geographies most severely impacted by COVID-19, also faces the possibility of a 2nd wave pandemic.

May Stats

As the markets begin to consider May stats, there should be an uptick from the, particularly dire, stats from March and April.

The bigger question, however, is whether market expectations have been managed by recent central bank commentary.

On Wednesday, FED Chair Powell talked of challenging times ahead. Other central bankers have talked from the same hymn sheet. The RBA and the RBNZ also talked of challenging times, with the ECB and BoE also on the same page.

So, when considering all the doom and gloom, what will it really take to deliver that market correction?

A continued slide in employment and consumer spending would certainly send the global financial markets into a spin.

With the global supply chain broken, service sector activity will have to be the area of focus. It is a chicken and egg situation, however.

Governments may have delivered unprecedented fiscal policy support and may well deliver more. Central banks have also thrown in the kitchen sink, some more than others…

It isn’t going to be enough, however, if consumer and business confidence continues to trail.

Business confidence is going to need to see a marked pickup to support a more optimistic outlook on hiring.

Only then can labor market conditions improve and support a pickup in consumption.

Gamesmanship and Geopolitics in Play

It’s not surprising that U.S President Trump was somewhat aggrieved by disease expert Dr. Fauci’s stark warning of reopening the economy too soon.

Throw in FED Chair Powell’s concerns over bankruptcies and that pace of hiring could materially lag market and government expectations.

Not only did Fauci’s comments come just ahead of Powell’s speech but also came off the back of news from Asia of a pickup in new coronavirus cases in South Korea and China.

I would anticipate that the situation should, in fact, be far worse across the EU.

For governments across the EU, they will also face the issue of border control and migration.

It would make perfect sense for freedom of movement to become an issue for voters across EU member states.

Let’s not forget that freedom of movement is the EU’s headline banner, as the British government discovered in the early days of Brexit negotiations.

The Eternal Optimist

For those believing that the latest pullback in risk appetite is yet another brief visit into the red, crunch time is approaching…

As lockdown measures continue to ease, the U.S and the EU, amongst other economies, must avoid another surge in new COVID-19 cases.

Such an outcome would deliver the consumer and business confidence needed to support an economic recovery.

It could go horribly wrong, however. Such an outcome would surely bring the Dollar ever closer to parity with the EUR. It would also raise bigger questions over the viability of the EU project.

Messages from Brussels have had a change of tone of late. The last thing that EU President Von der Leyen needs is another member state to join Britain in the departure lounge.

With Asia continuing to struggle and Britain entering dark times, even the more hawkish central banker will need to take a more cautious approach when discussing the economic outlook.

For the eternal optimist, the good news is that the global economy will recover.

Expecting riskier assets to find continued support and avoid a return to pre-Trump election levels, however, may be too big an ask…

After all, there is only so much massaging that a market can stomach.

At the time of writing, the EUR was down by 0.36% to $1.07790. How did the markets respond to a 2.981m surge in jobless claims, according to figures released today?

Badly…

EUR/USD 14/05/20 Daily Chart

Asian Stocks Finish Mixed as Investors Continue to Monitor COVID-19 Developments

The major Asia-Pacific stocks indexes finished mixed but mostly higher on Wednesday as caution remained over a recent resurgence in coronavirus cases in certain countries regionally as they start to reopen their economies.

Public health experts – including those at the World Health Organization (WHO) – have warned countries against lifting containment measures too early, which could cause a rebound in new coronavirus cases.

On Wednesday, Japan’s Nikkei 225 Index settled at 20267.05, down 99.43 or -0.49%. Hong Kong’s Hang Seng Index closed at 24180.30, down 65.38 or -0.27% and South Korea’s KOSPI Index finished at 1940.42, up 18.25 or +0.95%

In China, the Shanghai Index settled at 2898.05, up 6.49 or +0.22%. Australia’s S&P/ASX 200 Index finished at 5421.90, up 18.90 or +0.35%.

Japanese Stocks Follow Wall Street Lower

Japanese shares dipped further from a two-month high on Wednesday, tracking overnight losses on Wall Street on fears of a second wave of COVID-19 infections, while some profit-taking also weighed on the market.

Wall Street’s three major stock indexes dropped about 2% each on Tuesday following a warning from Dr. Anthony Fauci, the top infectious disease expert in the United States, that premature moves to reopen the economy could lead to a second wave of cases and set back economic recovery.

Traders also said some profit-taking was inevitable sooner or later because of the recent rally. On Monday, both the Nikkei and the Topix climbed to their highest levels since March 6.

Investors also kept a watch on simmering U.S.-China tensions after a leading U.S. Republican senator proposed legislation that would authorize President Donald Trump to impose sanctions on China if it fails to give a full account of events leading to the virus outbreak.

China Stocks End Higher as Healthcare Firms Gain

Chinese shares closed higher on Wednesday, reversing course from small losses as a rally in healthcare stocks boosted the index, although gains were capped due to persisting concerns around a potential second wave of COVID-19 cases.

Investors remain concerned about the risk of the renewed spread of the new coronavirus after the northeast Chinese city of Jilin said it would impose fresh restrictions on travel to contain the outbreak, with six new cases reported on Tuesday.

That came after Chinese health authorities on Tuesday called for vigilance to be maintained against the novel coronavirus as new clusters emerge, even though the peak of the epidemic has passed in the country where it first appeared.

Australian Shares Nudge Higher on Hopes of Quick Recovery

Australian shares reversed course to close higher on Wednesday, as heavyweight Commonwealth Bank of Australia’s shares rose after news of the sale of its wealth management business and coronavirus provisions being broadly in line with peers.

Market sentiment also recouped on hopes on a gradual reopening of the local economy and effective management of new virus clusters in the short-term. Data showed on Wednesday a measure of consumer sentiment jumped a record 16.4 percent in May from April, raising hopes of a relatively quick revival in spending.

East through West – Will a 2nd Wave Hit the West or Have Governments Learned from their Mistakes?

As the markets continue to react to the easing of lockdown measures in the West, dark clouds are gathering in the East. Or so it seems.

Following the lockdown across Hubei and beyond, in February and March, China and other economies hastily eased lockdown measures in April.

China’s private sector PMIs for both March and April reflected the effects of the easing in lockdown measures.

The PMIs also reflected the impact of lockdown measurers across the West that weighed on China and Japan’s PMIs in particular.

Global demand for both goods and services were lackluster going into May and it’s unlikely to materially change late in the 2nd quarter.

Throw in Trump’s accusations and attempts to lay the blame of the COVID-19 pandemic on China’s doorstep and the rush to open economies across the East may have been too hasty.

The East to West Migration

As was the case with the spread of the coronavirus, governments’ plans to ease lockdown measures followed a similar path.

China, Japan, and South Korea were amongst the 1st to announce plans to ease confinement measures.

We have since seen Italy, Germany, France, and Spain and other EU member states make similar moves.

Even the U.S administration has made its initial moves to ease confinement measures.

Ulterior motives

The EU and the East eased lockdown measures in response to falling new cases.

When considering how bad things were in Italy and Spain, recent COVID-19 numbers continue to impress. In fact, the numbers across the EU as a whole are far more impressive than those from the U.S.

The reason for this was the eventual shutdown of borders. One does wonder whether the catastrophe could have been avoided. Had EU member states agreed to shut down borders back in March, things may have been quite different…

For the U.S, it seems clear that the U.S administration is focused on the November Presidential Election.

An extended lockdown and the worst economic crisis in history would surely be the end of the Republicans.

This is assuming, of course, that Biden makes it to Election Day. The last thing Trump will want is to be tagged as the President that overshadowed the Great Depression…

Geopolitics

Trump continues to pass the blame of the U.S pandemic onto China and this is unlikely to change any time soon.

That time may eventually come, however.

We have seen the markets react to news of new clusters across Asia that have contributed to a decoupling across the equity markets this week.

The Asian equity markets have come under pressure, while the European majors have avoided a sell-off. For the U.S majors, it was a relatively positive start to the week.

For Some, blaming China once may be plausible, blaming China twice is an altogether different story.

Trump has stated that the opening of the U.S economy must continue irrespective of any impact on COVID-19 cases.

With the November Presidential Election now just months away, Trump has little choice but to take a chance. Why the Republicans are happy to go along for the ride is perplexing.

The price that the U.S population will pay, if it all goes wrong, will be horrific. Trump’s only hope is for an effective treatment drug and vaccine to be rolled out in the coming months. And, hopes that the U.S summer season will kill the virus…

A 2nd wave in China and South Korea suggests that climate has little to do with it… So, there is no place to hide out over the summer months.

Market Focus

On the economic data front, we are beginning to move through to May data, which will be particularly important.

April will need to have been the bottom for the markets to continue to believe in a relatively speedy economic recovery.

Dire employment numbers and PMIs in May coupled with a pickup in the daily COVID-19 numbers and we could be in for a far more severe market shock.

Either way, if the 2nd wave continues to gather pace across the East, expect the same to occur in the West.

Asian governments have been far more restrictive on travel and border control… The UK government only announced a 14-day quarantine for people entering the UK last week. That’s somewhat behind the curve…

For the U.S, it’s not just international borders but also state borders that need to be marshaled.

A 2nd coronavirus wave across the EU and the U.S is an unimaginable prospect.

The markets managed to take dire economic data, not seen in the post-war era, in its stride.

The outcome will be very different at the second time of asking and next time around the blame will lay squarely with those governments in a hurry to reopen.

At the time of writing, the EUR was up by 0.12% to $1.08194

EUR/USD 12/05/20 Daily Chart

How bad can it get? Well, a global depression stemming from an indefinite lockdown is what governments are trying to avoid.

A 2nd wave will not only leave international borders closed indefinitely but also leave governments to face civil unrest.

For the eternal optimists, an effective treatment drug is delivered on a global scale and there is no 2nd wave on the grand scale of the pandemic. We have yet to even hear of any evidence of mutation that could be the primary reason for the 2nd wave…

There is one other consideration for the markets, should a 2nd wave hit… A marked acceleration in inflationary pressures stemming from a sheer lack of availability of non-durables.

The Phantom Threat of Inflation and Fears of Covid-19’s Second Wave

This is associated with the emergence of a new sickness case in Wuhan, which brings back fears of a second wave of spread after the restrictions were lifted.

At the same time, the global picture clearly shows a decrease in the number of new infections and deaths in the past 24 hours. In our opinion, we should look for other reasons behind the difficulties of market growth. The US Treasury is draining market liquidity by placing unprecedented amounts of government bonds to finance support packages.

While the US Treasury is “vacuuming” the market, the demand for dollars remains high. Besides, the Fed has sharply reduced the scope of asset purchases on its balance sheet, which has lessened support for markets.

At the same time, investors take profit in those securities, which offset the decline of February-March. Sales on growth seem to be the prevailing strategy in recent days. The focus is on those shares that can benefit from the global economic slowdown.

First of all, these are producers of essential goods and grocery store chains. At the same time, there is a rupture in the supply chains of products, which makes us think about the risks of food inflation in the coming months.

Food does not play a significant role in today’s spending structure, with just 14% of expenditures. So, we are likely to see food prices increase along with a decline in the overall volume in the food industry in the coming months.

The inflation data published in China this morning showed a slowdown in consumer price growth in April to 3.3% YoY from 5.4% in January. The decline in producer prices accelerated to 3.1%, indicating a deflationary trend for almost a year.

Later this afternoon, the US data will be published, which is expected to show a slow down of CPI to 0.4% YoY, the lowest level in almost five years. Excluding energy and food prices, it is expected to slow to 1.7% YoY from 2.4% at the peak in February. Surprisingly, this indicator risks coming under pressure in the nearest months, justifying a softening of monetary policy.

But if we look further, the impending reboot of the logistics chain risks is becoming a severe factor in favour of rising inflation. Globalization was previously a crucial deflationary factor. Deglobalization promises to drive prices up, which is bad for the poorest countries as well as the rich.

By Alex Kuptsikevich, the FxPro senior market analyst. 

Asian Shares Decline in Reaction to China’s Inflation Miss, Renewed Coronavirus Concerns

The major Asia-Pacific stock indexes settled lower on Tuesday As investors reacted to disappointing Chinese inflation data for April. Shares were also pressured by growing worries about a second wave of coronavirus infections after the Chinese city where the pandemic originated reported its first new cases since is lockdown was lifted.

On Tuesday, Japan’s Nikkei 225 Index settled at 20366.48, down 24.18 or -0.12%. Hong Kong’s Hang Seng Index closed at 24245.18, down 356.88 or -1.45 % and South Korea’s KOSPI Index finished at 1922.17, down 13.23 or -0.68%.

China’s Shanghai Index settled at 2891.56, down 3.25 or -0.11% and Australia’s S&P/ASX 200 Index closed at 5403.00, down 58.20 or -1.07%.

China Factory Prices Plunge as Virus Hits Demand

China’s factory-gate prices fell to a four-year low, official data showed Tuesday, with firms suffering from the economic devastation unleashed by the coronavirus on the global economy.

The Producer Price Index (PPI) – which reflects what factories charge wholesalers – dropped again, fueling concern among analysts about the post-pandemic recovery in the world’s second-largest economy.

The PPI plunged 3.1% on-year in April – a 1.3% monthly drop compared with March – according to China’s National Bureau of Statistics. The slump in the PPI was the steepest monthly drop since the Global Financial Crisis of 2007-08.

The April drop was more severe than the 2.5% decline forecast by analysts, highlighting the continued stress on industries as they resume production after the economy was almost completely shut down at the height of the outbreak in China.

The Consumer Price Index (CPI), on the other hand, grew 3.3% in April, but less than the 3.7% forecast in a Bloomberg poll of analysts. That was the slowest pace since last September when inflation rose 3%.

Asian Shares Falter as Anxiety Grows Over Second Coronavirus Wave

The central Chinese city of Wuhan reported five new cases on Monday, casting doubts over efforts to lower coronavirus-related restrictions across the country as businesses restart and individuals went back to work.

The worrisome news follows a fresh outbreak in night clubs in South Korea and record number of new cases in a day in Russia.

“The re-opening of the global economy will likely follow the shape of activity in China. Businesses there have restarted operations but are not necessarily at capacity,” Bob Baur, Chief Global Economist at Principal Global Investors said.

“While businesses have mostly restarted, China’s households stay cautious. Restaurants are open, but seats are empty. Vehicle sales bounced off the bottom but are well below normal. Households in the U.S. and Europe will surely mirror this wary attitude even as activity picks up.”

Asian Shares Jump as Restrictions are Lifted While New COVID-19 Cases Rise in South Korea, China

The Asia-Pacific shares are trading higher early Monday as investors choose to focus on the future instead of the past. In this case, the positive outlook for the future is being fueled by optimism as more countries restart their economies. Additionally, like Wall Street on Friday, Asian investors are ignoring the worst U.S. employment data since World War II.

At 02:56 GMT, Japan’s Nikkei 225 Index is trading 20466.58, up 287.49 or +1.42%. Hong Kong’s Hang Seng Index is at 24685.11, up 454.94 or +1.88% and South Korea’s KOSPI Index is trading 1948.95, up 3.13 or +0.16%.

China’s Shanghai Index is trading 2904.23, up 8.88 or +0.31% and Australia’s S&P/ASX 200 Index is at 5455.60, up 64.50 or +1.20%.

Hong Kong Bounces Back

A week after posting its worst day in 6-weeks, Hong Kong’s Hang Seng Index is bouncing back on Monday. Last week’s selling was fueled by the release of the city’s economic growth data report that showed its biggest-ever quarterly economic contraction. First-quarter GDP dropped 8.9% compared with the same period a year earlier.

Monday’s surge is being fueled by carryover buying from Friday that was fueled by Beijing further opening its financial markets to foreign investors and as talks between U.S. and Chinese trade officials lifted sentiment.

Global Easing of Coronavirus Lockdowns and Restrictions Main Driver of Strength

Asian Traders are not only focusing on the region, but also on the global response to the virus. Investors continue to watch for developments on the coronavirus front amid hopes of global economies reopening as social distancing measures are eased. U.K. Prime Minister Boris Johnson outlined over the weekend a “conditional plan” to slowly reopen society and the economy. Disney is also set to reopen its Disneyland theme park in Shanghai on Monday.

Gains May Be Limited by New Virus Infection Headwinds

Despite the early strength on Monday, the markets still face headwinds which may limit gains. South Korea warned on Sunday of a potential second wave of cases, according to Reuters. That came days after the country, praised for its rapid response to stem the spread of an initial outbreak, eased restrictions. Infections rebounded to a one-month high.

Meanwhile in China, the National Health Commission (NHC) reported 17 new cases, of which 10 were locally transmitted infections and seven were imported, or attributed to travelers from overseas.

New Infections also accelerated in Germany.

Japan Plans Second Package to Combat Economic Impact

Japan’s Nikkei 225 Index jumped early Monday after Reuters reported, citing the Nikkei newspaper, the country is set to launch a second budget to help the country tide over the economic fallout from the pandemic

New measures will include aid for companies struggling to pay rent, and more subsidies for those hit by slowing sales, according to the report.

Asia-Pacific Shares Finish Week Mixed, but Upbeat Over Improving US-China Trade Relations

The major Asia-Pacific stock indexes finished mixed last week. Gains were posted in Japan, China and Australia. South Korea and Hong Kong were lower. Investors took most of their cues from Wall Street and economic data from China. Some of the results were skewed because of holidays early in the week.

In the cash market last week, Japan’s Nikkei 225 Index settled at 20179.09, up 559.74 or +2.85%. South Korea’s KOSPI finished at 1945.82, down 1.74 or -0.09% and Hong Kong’s Hang Seng Index closed at 24230.17, down 413.42 or -1.68%.

China’s Shanghai Index settled at 2895.34, up 35.26 or +1.23% and Australia’s S&P/ASX 200 Index finished at 5391.10, up 145.20 or +2.77%.

Japan – Easing of US-China Tensions Fuels Surge

Japanese shares advanced last week, in line with Wall Street’s gains, as news of top trade representatives of China and the United States holding phone talks calmed investors worried about simmering Sino-U.S. tensions, with cyclicals leading the rally.

On the domestic front, hopes for a potential lifting of Japan’s state of emergency in some areas before the nationwide deadline of May 31 also supported investors’ risk appetite, said traders.

Gains may have been limited because of the short public holiday week.

Top U.S. and Chinese trade representatives discussed their Phase 1 deal over the phone on Friday, with China saying they agreed to improve the atmosphere for its implementation and the United States saying both sides expected obligations to be met.

Japan’s economy minister Yasutoshi Nishimura said on Friday that more prefectures were reporting zero coronavirus cases on a daily basis and lifting the state of emergency for those regions before the nationwide deadline was within sight.

Hong Kong – GDP Plunges

Hong Kong posted its biggest-ever quarterly economic contraction on Monday, as the coronavirus pandemic dealt a blow to the Asian financial hub following months of social unrest.

First-quarter gross domestic product dropped 8.9% compared with the same period a year earlier, according to an advance government reading, falling short of market expectations and marking the city’s steepest GDP decline on record.

The economic downturn is attributed to “the continued weak performance in both domestic and external demand, as affected by the COVID-19 pandemic,” a government spokesperson said in a statement, adding that U.S.-China tensions and financial-market volatility “continue to warrant attention.”

In a news conference on Monday, Financial Secretary Paul Chan said the city’s economy “would not revive in the short-term,” as the three pillars of Hong Kong’s economic growth – exports, investment and consumption – have all been severely hit.

Australia – Buyers Cheer Lifting of Coronavirus Restrictions

Australian stocks ended higher last week, marking their second straight weekly gain, after the government unveiled plans to end most coronavirus restrictions by July and as talks between U.S. and Chinese trade officials lifted sentiment.

Hopes for an economic recovery at home got a boost from Prime Minister Scott Morrison’s plan to ease social distancing restrictions in a three-step process, which would remove all curbs by July and get nearly 1 million people back to work amid a decline in coronavirus cases.

Asia-Pacific Shares Lower as China Exports Surprisingly Rise, but Drop in Imports Signals More Trouble Ahead

The major Asia-Pacific stock indexes finished mostly lower on Thursday as mixed economic data from China weighed on investor sentiment. Investors were also encouraged to sell stocks by downbeat U.S. economic data and worries over fresh hostilities between Beijing and Washington after U.S. President Donald Trump said he was watching closely whether China would meet its commitments to increase U.S. goods purchases under the Phase 1 trade deal.

On Thursday, Japan’s Nikkei 225 Index settled at 19674.77, up 55.42 or +0.28%. Hong Kong’s Hang Seng Index finished at 24012.04, down 123.07 or -0.51% and South Korea’s KOSPI Index closed at 1928.61, down 0.15 or -0.01%.

China’s Shanghai Index settled at 2871.52, down 6.62 or -0.23% and Australia’s S&P/ASX 200 finished at 5364.20, down 20.40 or -0.38%.

China’s Exports Unexpectedly Exceed Expectations

China reported that its dollar-denominated exports rose but imports fell for the month of April as movement restrictions to contain the coronavirus outbreak eased.

Data from the General Administration of Customs released on Thursday showed exports rose 3.5% from a year ago while imports fell 14.2% in the same period.

Economists polled by Reuters had expected exports to have fallen 15.7% in April from a year earlier while imports were expected to have fallen 11.2% from a year earlier.

In March, China’s exports fell 6.6% from a year ago, while imports slipped 0.9% in the same month.

China’s trade surplus for the month of April was $45.34 billion as compared to the $6.35 billion economists polled by Reuters had predicted. China reported a trade surplus of $19.9 billion for the month of March.

China’s Services Sector Contracts for 3rd Month as Job Losses Hit Record

China’s services firms wallowed in contraction in April as layoffs hit a record and export orders plunged after signs of improvement in March, a private survey showed, dashing hopes of a quick recovery from the coronavirus blow.

The Caixin/Markit services Purchasing Managers’ Index (PMI) did manage to pull up to 44.4 in April from 43 in March, but remained in a deep slump and far below historic averages.

Meanwhile, Caixin’s composite manufacturing and services PMI, also released on Thursday, picked up to 47.6 from 46.7 in March. Though the rise suggests that the initial shock from the virus outbreak is easing, the reading remained below historical averages.

Major Japanese Indexes Finished Mixed

The blue-chip Nikkei average edged up on Wednesday, helped by gains in semiconductor-related stocks. Chipmaking gear manufacturer Tokyo Electron Ltd rose 3.2% and test device maker Advantest Corp climbed 3.3%, tracking gains in U.S. peers.

The broader Topix index dropped 0.32% to 1,426.73, with air transport and land transport among the worst three performing sectors on the local bourse, down 6.8% and 2.9%, respectively.

Japan extended a nationwide state of emergency on Monday, underscoring expectations that travel demand was unlikely to recover anytime soon.

On Thursday, Japan Airlines shed 6.9% and ANA Holdings lost 6.7% as U.S. peers plunged earlier this week on news that billionaire Warren Buffett had sold his entire stakes in the top four U.S. carriers.