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After suffering a setback the likes of which we’ve never seen before, the global economy is gradually turning a corner. Here, Global Head of Desk Strategy Jim McCormick outlines the market trends we’ll be looking at as we continue along the path to recovery.
Since March, when lockdowns caused the quickest and most severe contractions in activity on record, the global economy has begun to slowly recover. In market, we’re seeing some classic signs of recovery: core curves steepening, higher breakeven inflation and a lower US dollar.
What’s more, the composite Purchasing Manager Index (PMI) is expected to reach 50 – a signal of economic expansion – by July. As the global economy enjoys this recovery phase risk assets should remain supported.. But to put the rebound into perspective, the global economy isn’t expected to reach its pre-crisis level until the middle of next year.
Economic recovery: Global PMIs set to rebound
So what kinds of things should corporates and investors look out for against a backdrop of gradual economic improvement? One of the biggest themes we’re looking at is how some countries have been hit by coronavirus worse than others, and that a good way for investors to capitalise on this trend is by taking positions in the currency markets.
Let’s take a look at some of the trends on our radar for the next few months.
1. Inflation low for now, but to rise in the medium-run
The global policy response in response to the coronavirus crisis is unlike anything that has come before, with aggregate US, Euro area and UK net issuance set to surge to USD 5.6 trillion this year. We think fiscal policy will continue to play a large role in the months ahead.
G3 net bond issuance
Even though inflation’s likely to remain low in the near term, this surge in the money supply, combined with the supply shock caused by coronavirus, is very likely inflationary over the longer term.
2. Slowly recovering consumer confidence
The shape of the economic recovery will be largely influenced by consumer behaviour and spending patterns. As the first country to suffer from the virus, we can learn a lot from China where retail sales have been picking up but only very gradually since their coronavirus-induced slump.
Chinese retail sales are rebounding, but slowly
Retail spending will clearly be heavily influenced by how quickly lockdown measures ease and economies reopen. European countries that imposed stricter social-distancing measures saw the biggest slump in sales.
There are still big disparities across Europe in terms of how open countries are for business: the UK is imposing some of the strictest social-distancing measures, and the Scandinavian countries the least stringent.
3. The euro area a bright spot
Having been one of the worst-hit regions early on in the coronavirus pandemic, the Euro area is now leading the way out of the crisis. Germany in particular is quickly returning to normal after managing the coronavirus crisis especially well, while some of the euro area’s weaker members are benefitting from strong support from the European Central Bank.
Coronavirus cases and mortalities are sharply down in the EU
Source: NWM, ourworldindata.org, worldometer, Johns Hopkins University
What’s more, after a speculated possible break-up of the euro area hit investor sentiment earlier in the year, confidence in the euro area’s prospects is likely to increase as a result of a recently announced EUR 750 billion recovery fund. In our view this is a game-changer because the money is being borrowed in the name of the EU rather than individual countries, and it’s received the full support of Germany, the bloc’s most powerful member. As outlined in our recent article, we’re expecting the euro area to strengthen rather than break up.
4. The US still a cause for concern
The US has suffered the highest number of deaths from coronavirus, and the number of cases continues to rise in many states. With daily case counts in the US still very high, the risk is the re-opening of many state economies will be derailed.
The US is still suffering badly from coronavirus
Source: NWM, ourworldindata.org
That’s not the only cause for concern in the US. Presidential elections are always an area for investors to watch, and in the November vote is likely to be close – and certainly more contentious than usual.
Another concern is the ongoing trade tensions with China. The two countries may have signed their Phase One trade deal in January, but the coronavirus has opened up a whole new front in the trade war. As we’ve discussed before here, with the US facing a historically deep recession, President Trump looks likely to run a “Tough on China” platform and polling suggests that this would be popular among the US electorate.
5. Brexit hasn’t gone away
The UK has been hit hard by coronavirus, with the third-highest number of deaths in the world after the US. Progress is now being made in bringing the outbreak under control, but it’s still lagging behind other European countries.
And all these problems have deflected attention from an issue that hasn’t gone away: Brexit. As we’ve discussed, the clock is ticking on the end-of-2020 deadline to agree a trade deal with the EU, and even if a deal is agreed, it’s likely to be a very basic one. A phased transition to the new UK-EU trading relationship remains a possibility, despite the UK Government ruling out an extension to the implementation period.
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