Global recovery as “old risks” re-emerge

We are encouraged by the signs that the virus is getting under the control in more advanced economies and the re-opening can start. We know from the experiences in Denmark and Norway that consumption can return rather quickly when the virus gets under control, the fear of catching COVID-19 declines and the economy starts to re-open. Looking at the US, we are seeing some signs of improvement in high frequency data, e.g. consumption seems to be improving gradually (transaction card data), see US Macro Monitor: Early signs the bleeding is stopping but the wound has not healed, 26 May.

Last week, the EU Commission unveiled its recovery fund proposal ("Next Generation EU"), which sent EUR/USD higher, for more details see Flash Comment: Next Generation EU – a landmark for European history? 27 May. The negotiations are now set to begin and the ambition is to reach an agreement by July. Focus is in particular on the "frugal four" who think aid should come in the form of loans. The plan will require unanimous backing from all 27 EU member states. Any signs of softening from the frugal four will be cheered by the market, but there is also the risk of setbacks in the optimism if there is any indication that the grant element could be watered down in negotiations.

US-China tensions have been increasing lately and we will continue to monitor the development closely. Trump will announce some sanctions related to Hong Kong by the end of the week. More important for markets, though, will be any signals on the phase 1 deal. We assign a 50% probability of the trade war re-emerging, but do not think it will happen near term.

At next week's ECB meeting, we expect the ECB to expand the Pandemic Emergency Purchase Programme (the temporary QE programme during the pandemic) by EUR500bn into June 2021. We do not expect new asset classes to be added at this stage, but we do expect an extension of the EUR20bn/month "normal" QE programme already in place before the pandemic. For more details see ECB Research - PEPP'in it up, 28 May.

Next week, the fourth round of Brexit negotiations is set to begin on Monday. We do not expect any major breakthrough, as the EU and the UK remain far apart on the most important subjects. The ambition is to have concluded the negotiations on fishery and financial services by 1 July. We do not expect the UK to ask for an extension ahead of the 1 July deadline on this decision. We expect GBP to weaken, as investors start to reprice the Brexit risk premium.

Some interesting data releases are due out next week. In China, PMIs in May are due out, which will be interesting given China is ahead of most countries in terms of opening up. There was a big dispersion between the two PMI indices for services, NBS (53.2) and Caixin (44.4). We do not have any strong views here, but our best guess is that NBS will decline and Caixin increase. In the US, the jobs report for May is due out on Friday, which may show that employment has declined by another 10 million (the unemployment rate may increase above 20% depending on how many have left the labour force). We also get unemployment data for April in both the euro area and Germany.

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