13 to 20 July: China’s GDP growth rebounds in second quarter

Gross domestic product in China bounced back in Q2, with the economy growing 3.2% YoY. This followed the 6.8% decline in Q1 and exceeded economist forecasts of 2.5%. Industrial production was bolstered by stimulus measures from authorities and grew 4.4% YoY in Q2, with most of the growth coming from energy production, raw materials and tech components. However, retail sales remained soft, falling 3.9% in Q2. We see an uneven picture forming in consumer spending; with certain areas like premium autos remining robust and covid affected sectors like leisure recovering at a much slower pace. Meanwhile, a separate report showed that exports and imports both rose in June, rising 0.5% and 2.7% respectively. Demand for Chinese exports is improving in key markets like the U.S. and EU as a result of easing lockdown measures and improving consumer spending.

6 to 13 July: Relations wane between Beijing and the West

In response to China’s security crackdown in Hong Kong, France and Germany have proposed new retaliation measures to the EU. These new measures include granting political refuge for activists, offering additional scholarships for Hong Kong students and also banning the export of police equipment such as tear gas.

Since Hong Kong’s security law was enacted, Canada and Australia have suspended their extradition treaties with Hong Kong. Whilst Australia has also offered to extend visas to Hong Kong residents by five years – providing a pathway to permanent residency for up to 10,000 people. In a similar vein, the UK has promised to offer nearly 3 million Hong Kong residents with British national overseas status. It’s clear that international relations with Beijing have worsened in recent weeks, with western democracies demonstrating a more unified response to China. We continue to remain cognisant of the increasing political risks in the region.

Meanwhile, mainland indices in China rallied last week after a state-run publication praised the country’s economic recovery and endorsed the rally in equities. This sent the benchmark Shanghai Composite Index to a two-year high.

29 June to 5 July: Stronger headlines, but weaker underlying jobs numbers in the US

The US jobs report for June was stronger than market expectations, as non-farm payrolls indicated that the economy added 4.8 million jobs in the month, whilst the unemployment rate declined to 11.1%, from 13.3%. Although the headline datapoints were stronger than for what the broad market was positioned for, the overall state of the US labour market remains in one of the weakest spots on history. We believe investors overlooked the facts that 31.5 million people were claiming unemployment benefits in June, whilst the level of employment was 15 million lower than in February – before the pandemic. Furthermore, it is highly likely that the headline unemployment rate substantially understates the actual extent of joblessness in the US, since to be classified ‘officially’ unemployed by the statistics, one needs to be ‘actively’ looking for work, whilst there is no need for that to claim unemployment benefits. In our opinion, it is concerning that some soft indicators (for example the ISM index) signal further weakness in the jobs market and suggest job shedding contraction would continue. And, the fact that many states have backtracked on the idea of re-opening their economies and imposing lockdowns again will probably mean a delay in the start of a sustained recovery in employment.

What the broader stock market in the US seems to ignore – for right or wrong – is the fact that we are still at the early stages of this crisis, which is different in nature than previous ones. Therefore, we arrive at the conclusion that the economic headwinds and longer-term structural shifts that may shape specific industries (with hospitality and transportation being some of the obvious examples) are not being taken into account by the market.

22 to 28 June: A packed economic diary to shape global market sentiment

The coronavirus pandemic triggered an unprecedented decline in the world trade volume, which declined 16.2% YoY in April, according to the CPB’s World Trade Monitor. All regions reported a fall in trade volumes, but the Euro Area was the hardest hit. As April was affected by the most widespread and stringent lockdown measures globally, trade volumes were negatively impacted by disruptions to production and logistics as well as less demand globally. According to the IMF’s latest World Economic Outlook, world trade could contract by as much as 11.9% this year, which translates into a 4.9% decline in GDP. The organisation’s forecast suggests that it will take a considerable time for the world to recover lost output, as the IMF expects a modest 5.4% recovery in GDP in 2021.

The economic diary contains quite a few relevant macro data releases this week. Investors will scrutinise PMIs all over the globe as well as Fed’s minutes and the latest labour market metrics in the US. In addition, the news flow related to the spread of the coronavirus, the re-opening or closing of economies and the geopolitical tensions between the US and China could meaningfully shape global appetite for risk assets.

15 to 21 June: Investors to focus on PMIs and central banks this week

The latest macro data in the US revealed that the sharp decline in economic activity stopped and to some extent reversed in May: industrial production rose 1.4%, whilst retail sales climbed 17.7% relative to April. Despite the bounce in retail sales, it remains well below the pre-pandemic level. Although both figures look very promising at first sight, the Chair of the Federal Reserve called for caution claiming that ‘until the public is confident that the disease is contained, a full recovery is unlikely.’ According to Mr Powell, the US’ economy is entering a phase soon where increases in re-employment can begin. However, he remained very cautious with his remarks on the economic outlook by putting an emphasis on unusually high level of uncertainties, which can prolong the recovery.

During the week, PMI figures will be released in developed countries for June, which will help investors gauge the state of economies such as the US, the UK and the Euro Area. In emerging markets, many central banks will hold regular monetary policy meetings during the week (e.g. the Philippines, Mexico, etc.), where policymakers decide on interest rates and also release an updated assessment on their respective domestic economies.

8 to 15 June: The Fed is not even thinking about the thought of higher rates

The title is paraphrasing Jerome Powell, the Chair of the Federal Reserve (Fed), who painted a sobering picture of the US’s economic prospects on Wednesday. According to the Fed’s latest economic forecast, real GDP could contract by as much as 6.5% this year followed by a recovery in 2021, when economic growth could reach 5%. In practice this means that the US’ GDP would not return to the pre-pandemic level before 2022 at the earliest – provided the Fed’s underlying assumptions are realistic. Mr Powell sent a very powerful message by stating that the FOMC unanimously sees the current Fed funds rate range of 0-0.25% stable by the end of 2021 (‘We’re not even thinking about thinking about raising rates’), whilst monthly asset purchases will continue as long as needed to ensure the orderly functioning of financial markets and to minimise the long-lasting negative impact of the coronavirus. In response to the Fed Chair’s remarks, President Trump’s tweeted that the Fed ‘is wrong so often.’ In the POTUS’ view the third quarter will be ‘very good’ and the fourth quarter will be ‘great.’ Although the President himself was openly displeased with the Fed, his administration’s economic advisor, Lawrence Kudlow, struck a more constructive tone, when he stated that it would be difficult for the Fed to offer a more accommodative policy stance.

This week, retail sales and industrial production data will be released in the US, which should provide some insights how economic activity in the world’s largest economy evolved in May. Elsewhere, the Bank of Japan and the Bank of England are scheduled to decide on interest rates and asset purchases, whilst the Fed Chair will deliver his semi-annual monetary policy report to Congress.

1 to 7 June: All that glitters is not gold

The saying in the title applies to the latest jobs report in the US, which was released on Friday. Although the headline labour market figures did not look as dire as the consensus estimated, the stock market’s exceptionally positive reaction to the report feels very much to be at odds with the economic reality in the US. In May, non-farm payrolls rose by 2.5 million, whilst the official unemployment rate declined to 13.3%, but remember that the number of employed people in the US is lower by almost 20 million since February. Although this crisis is not the same in nature as the Great Financial Crisis (GFC) was, it is one of the very few reference points we have. At the time of the GFC, it took about 3.5 years to recoup the economic losses in terms of real GDP in the US. As the S&P 500 is virtually flat year-to-date, the question arises whether the stock market is taking the view that ‘this time is different’ and everything is going to be fine very soon or purely that the index itself is no longer a fair representation of the broader US economy.

25 to 31 May: Re-opening economies and politics to shape markets

As we noted in the previous week’s Global Markets Update, geopolitics have returned to the limelight, again, although it has not dented global market sentiment significantly yet, in our opinion. On a forward-looking basis, we see two key themes unfolding: (1) governments experimenting with re-opening their economies, whilst attempting to prevent a second wave of large-scale spread of the coronavirus and (2) domestic and geopolitics in all shapes and forms hijacking headlines, such as the re-escalation of the US-China standoff, the upcoming Presidential elections in the US, unrests in the US or the Chinese administration’s intervention in Hong Kong’s legal system through the new national security law, which in turn risks Hong Kong’s special status under US law.

Later this week, the devastation of the coronavirus pandemic on the US’ labour market will be showcased by the monthly jobs report, which could show an unemployment rate hitting 20% in May. This would be highest jobless rate since the Great Depression at the end of 1930s.

18 to 24 May: The coronavirus might take the backseat as markets’ focus shifts towards geopolitics

The latest world trade figures for March showed a pronounced decline in world trade volumes, as they fell 4.3% YoY, according to the CPB’s latest World Trade Monitor report. From a regional breakdown, the decline was the sharpest in the Eurozone (-9% YoY; including both intra- and extra-Eurozone foreign trade). Elsewhere, foreign trade volumes decreased 5.2% YoY in the US and 0.5% YoY in China. Unsurprisingly, global industrial production volume weakened as well – falling 4.7% YoY in March. On a forward-looking basis, we might see dreadful world foreign trade data in 2Q20, as the number of idle container ships has been rising throughout May.

On the global political front, there is a lot going on, again. At a meeting of mainland China’s National People’s Congress last week, authorities said they would go around Hong Kong’s own legislature and draft measures against secession, foreign influence and terrorism via additions to the territory’s constitution. In response to China’s declaration, thousands protested in Hong Kong against China’s interventionist approach. Furthermore, the tensions between the US and China continued to boil, as China denounced a recent move by the US to blacklist certain Chinese entities. In our opinion, markets’ focus could shift from the coronavirus’ implications towards geopolitics in the near term.

11 to 17 May: Markets to focus on policy agendas in the US and China

Federal Reserve Chairman Jerome Powell said in an interview that the US economy could take more than a year to recover from the coronavirus-induced shock. Mr Powell added that it was ‘reasonable’ to think that the unemployment rate would keep rising through June and begin to decrease when businesses reopen. The Fed Chairman cautioned that it would be hard for the public to be ‘fully confident’ until there is a vaccine for the new coronavirus. Although Congress has appropriated nearly USD 2.9tn so far to support households, businesses, health-care providers and state and local governments (about 14% of GDP), Mr. Powell called for additional spending to prevent long-term damage. The Fed Chair ruled out the introduction of negative interest rates in the US.

As the economic diary is relatively light this week (developed market PMIs and a couple of EM central bank meetings are scheduled), markets will most likely shift their focus towards policymakers in the US and China. Whilst the Democrats in the US are trying to wrestle Republicans to pass another round of large-scale economic relief package (of about USD 3tn), the Chinese government will meet at the National People’s Congress starting on Friday to discuss the policy agenda. Furthermore, President Trump’s occasional and unpredictable tweets on foreign policies and trade relations will draw investors’ attention.