Week Ahead: Is the economic recovery stalling?

Country

US

Possible further evidence that the US economy is stalling could continue to take a bite out of risk appetite.  On Monday, the ISM manufacturing reading is expected to show the rebound continues, with textile mills, wood products and furniture leading the way.  The virus spread however will drag down prospects for new orders and investors will likely be skeptical of any strong prints.

The main event of the week is the US July unemployment report.  Job growth is expected to come in at a much slower pace, a gain of 1.52 million jobs, lower than the prior 4.8 million in June and the 2.5 million in May.  Given the volatility of this release, traders should not be surprised if we see a negative print.  If too much damage happens in the labor market, it won’t matter how much stimulus is thrown at the situation.  The recovery can level off, but if it reverses, that could trigger a significant selling of risky assets.

US Politics

Lawmakers have botched the latest COVID-19 relief bill.  Partisan politics provided unnecessary uncertainty for many Americans and that will weigh significantly with upcoming consumer data points.

Former-VP Biden will make his decision on his running mate.  Biden has signaled four African American women are under consideration as his running mate.  Biden will turn 78 a few weeks after the election, so his VP selection will be critical for many voters.

EU

The EU is officially in recession. No shock there, obviously, but as with the rest of the world, there are pockets of concern, Spain being one of those. With the UK imposing restrictions on those travelling to Spain this week, the tourism sector looks set to take another hit in what should have been the crucial final months of the summer. This may not be the bounceback third quarter the country had been hoping for. PMIs next week may give a sense of the mood heading into the end of the summer among businesses.

UK

The sterling recovery trade gathered momentum this week, even as parts of the UK faced tightening restrictions following a rise in Covid cases. The inevitability of this possibly explains why the currency has shrugged off these latest developments but its resilience may be tested over the next month.

Next week’s BoE meeting shouldn’t offer much of interest, with the central bank having only just increased its asset purchases and policy makers not likely ready to go negative on rates.

South Africa

South Africa is in the midst of a severe recession and is expected to contract by more than 7% this year. This comes as government debt balloons and with its credit rating already in junk territory. Moreover, Covid cases and deaths are on the rise even as the government attempts to ease restrictions, which have been among the harshest in the world. Difficult days lie ahead.

China

The Caixin PMI’s are expected to remain expansionary highlighting a slow but steady recovery.

Geopolitics is quiet at the moment as domestic issues take Trump’s attention.

Hong Kong

Covid-19 spread increases restrictions in HK. HK CEO to announce postponement of election due to Covid-19. Comes after 12 opposition candidates were barred under security provisions. None of this is good economic news for Hong Kong.

India

Covid-19 cases continue skyrocketing. India is now in top 4 for infections. INR remains under pressure as stress on the government budget and banking sector continue. A weaker US Dollar appears merely a stay of execution.  Very real possibility that India will repeat Indonesia’s recent playbook, and get the central bank to directly purchase new government bond issues. Negative currency and stocks.

Highest risk economy in Asia from an economic and Covid-19 perspective.

The Reserve Bank of India to cut 25 bps this week, will not lift the gloom.

Australia

Australian Dollar grinds higher but momentum slows as domestic issues weigh heavily..

Restrictions increased in Melbourne as Covid-19 cases jumped to 700+ a day. Borders closed with NSW and Queensland. Community infections increase in Sydney. Beginning to weigh on domestic recovery sentiment. The return of movement restrictions in Sydney a potential negative game-changer.

RBA rate decision. Unchanged but uber-dovish guidance. AUD has not rallied high enough to bring comments yet.

Japan

USD/JPY has crashed through 106.00 approaching 104.00. Higher Yen is driven by weaker Dollar and haven flows, weighing on Nikkei 225 with its export heavy components.

Covid-19 cases continue spiking higher in Tokyo. Local government is close to finally declaring a state of emergency. Negative Japan equities and Yen.

Markets

Oil

Crude prices could start to slide further since global oil demand continues to struggle and as OPEC+ begins to ease production cuts.  WTI crude prices continue to hang around the $40 level since the consensus remains that the worst of the economic downturn is behind both the Americans and Europeans.  The global economic recovery is teetering but a persistently weaker dollar and the ability for OPEC+ to remain nimble regarding production cuts have provided a strong layer of support for oil prices.

Important Chinese manufacturing data showed their recovery is still intact, however concerns remain that the data is plateauing.  The crude demand outlook will be dictated by the spread of the virus and in the short-term, it seems the US is getting a handle of the virus and that after a painful few more weeks, new cases, hospitalizations will all be trending lower.

Oil prices seem poised for further consolidation with risks to the downside.  WTI crude could consolidate between the $38.50 and $42.50 region for the next week.

Gold

Gold mania continues and after tentatively clearing the $2000 level, traders are starting to doubt whether a profit-taking pullback is in the cards.  Safe-haven demand remains strong as Congress and the White House continue to struggle to break the impasse on extending emergency unemployment benefits.  Gold will continue to shine bright as real yields continue to fall deeper into negative territory, virus surges will keep economic recoveries limited, and the stimulus trade will not go away until the labor market bounces strongly back.  Skyrocketing since the middle of July, gold should see a significant pullback at some point over the next week.

Bitcoin

Bitcoin continues to benefit from the dollar’s demise.  The largest cryptocurrency in the world continues to dominate, now making up just under 80% of the crypto market.  Bitcoin seems like it has room to run higher but calls for a return to record highs seems premature.