Markets are watching optimistically for further evidence of a peak in cases and deaths from coronavirus. Global equity markets improved again last week. UK 10-year gilt yields have increased, suggesting that markets expect rates to increase from their record low. Brent crude oil was back above $30 a barrel as a production cut was agreed between the major producers. The US dollar has generally underperformed, as risk concerns decrease. Sterling recovered to around $1.25, helped by the fact that PM Johnson is out of intensive care and recovering at Chequers. This week, the cabinet is expected to confirm the lockdown will continue for a further 3 weeks before another review.
There is cautious optimism that the Coronavirus curve is being flattened, with new infections rising at a slower pace. That has raised hopes that major economies may be closer to reopening. In China, restrictions have already been eased in the city of Wuhan where the pandemic began. Spain has also talked about relaxing the lockdown as cases are falling. In some countries, cases and fatalities continue to rise, so restrictions look likely to be extended.
The scale of the global economic impact remains the major concern of the markets. This week is the start of the quarterly earnings season, which could increase volatility in global equity markets. From an economic data standpoint, the focus will be outside of Europe. The only UK release next week is the BRC retail sales. This is an early indicator of retail sales in March, including the period when the lockdown began. Even before social distancing measures were introduced, figures last week showed the economy only growing by 0.1% in the three months to February.
GBPEUR – 1.1482
GBPUSD – 1.2560
This week, we will see China’s Q1 GDP figures along with March data including retail sales and industrial production. As China went into lockdown two months before most other countries, markets expect Chinese data to act as a template on the impact of shutdowns on countries economies. Expectations are for another quarter-on-quarter contraction of around 10%. The March numbers are forecast to show some respite in the downturn, with retail sales predicted at -9.5% and industrial production at -5.4%. Both would be smaller falls than the last two months.
In the Eurozone, February industrial production will not give much interesting information as the figures predate the economic shutdown. At the end of the week, we will see the final inflation figures for March with expectations for a fall to 0.7%. The fall in oil prices is likely to have more than offset an increase in food costs. The euro gained over the course of the week with general US dollar weakness. However, peripheral spreads remained wider as Eurozone finance ministers failed to agree on an EU safety net to address the economic impact of the coronavirus. Discussions continue about whether there will be some form of Coronabonds.
EURUSD – 1.0939
EURGBP – 0.8709
This week, we will get more information on the impact of Coronavirus on the US economy. Weekly initial jobless claims figures have already shown a total increase of about 16 million in the past three weeks. Further key data this week include March retail sales and industrial production as well as housing starts and building permits. Sharp declines are predicted in all of these with a monthly drop of around 6% for retail sales and 4% for industrial production. There is a significant variation in forecasts, highlighting the high degree of uncertainty on the scale of the virus impact.
Markets will also be watching timelier information to give insight into the effects on the US economy. The NY Fed Empire and Philadelphia Fed manufacturing surveys are expected to fall significantly again, to -29 and -25 respectively showing sharp contraction. The NAHB (housing) survey is expected to drop to 60. We also see the start of the quarterly earnings season, which is likely to add to volatility in the equity markets. It remains to be seen how much of the impact will come through into different companies results for the quarter.
GBPUSD – 1.2560
EURUSD – 1.0939
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*Interbank rates correct as at 7 am on the date of publishing.