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2nd wave concerns remain but Trump clarification and strong PMI gains provide a respite for risk sentiment overnight

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2nd wave concerns remain but Trump clarification and strong PMI gains provide a respite for risk sentiment overnight                    

  • USD: Risk appetite improves overnight with the greenback slipping lower but Gold still moving higher (even as risk - on sentiment gains) as US, euro area, UK and Australian June PMIs show impressive gains. Also helping is President Trump’s tweets that the US-China trade deal is “fully intact”. This is a reaction to an earlier misinterpretation of US Trade Advisor Peter Navarro’s comments in Asian time, saying “it’s over” in a dialogue about China. Investors initially interpret this as a reference to the US – China phase one deal but both Navarro and the subsequent Trump clarification indicate the comment is not meant to refer to the trade deal.     
  • USD: Meanwhile, US state officials leave door open to renewed restrictions on activity as concerns continue to rise on the coronavirus front. Comments (per Bloomberg) from State Governors in California and Texas suggest renewed lockdowns remain a possibility despite little political and economic appetite. California Governor Gavin Newsom also says overnight that a jump in cases and hospitalizations over the past two weeks is “sobering” (2.4% growth overnight, +4230) and thinks the state is still in the first wave of the virus. He urges residents to take actions to mitigate the spread and reduce the likelihood of a return of stay-at-home orders, stating - “We don’t intend to do that, we don’t want to do that, but I want to make this clear - we are prepared to do that if we must.” 
  • USD: Texas hospitals admit 302 new Covid-19 patients in the past 24 hours, the biggest one-day influx since June 4. The positive-test rate also ticks higher, reaching 9.51%, the highest since April 20 and more than double the rates seen in late May, according to state data. New cases rise by 2.9% to 114,881, lagging the seven-day average growth of 3.5%. Texas Governor Greg Abbott says the contagion is accelerating at “an unacceptable rate and must be corralled”….though “closing down Texas again will always be the last option.” This follows news that the ICU capacity in Harris County, Texas which includes Houston will likely be exhausted in 11 days at current expansion rates. Mind that Houston is home to the largest medical center in the world. Finally, Miami’s mayor Suarez says the reopening of movie theaters, nightclubs and other large venues in the city of Miami is being delayed because of the spike in coronavirus cases. Mask wearing is also made mandatory.  

 

Data releases – June flash PMIs show impressive gains

  • USD: US PMIs rise to just below 50 and expected to increase further  - US Markit manufacturing PMI rises from 39.8 to 49.6 in June, and services PMI is up to 46.7 from 37.5. New orders components for both indices rebound to just-below 50 from around 40 in May and both employment subcomponents rise to the high-40s from mid-30s. Strength in regional survey indicators also suggests a high likelihood that US ISMs could rise above-50 in June. That said, the rising virus case counts in some states poses a risk of renewed shutdowns and dropping activity. For now though, Citi analysts expect US PMIs will rise above 50 in coming months, indicating expansion after forced shutdowns.     
  • EUR: Euro area PMIs: strong rebound to 4-month highs in June, but still short of 50  - the Flash composite PMI is up 15.6pt to 47.5 (Mkt. 43.0), Flash services PMI rises 16.8pt to 47.3 (Mkt. 41.5) and Flash manufacturing PMI is up 7.5pt to 46.9 (Mkt. 45.0)  Markit notes output, new business, order backlogs and staffing levels continue to soften in June, albeit at a much slower pace. However, improvement in business expectations for the year ahead see the number of optimists exceed pessimists for the first time in 4 months. COMMENT: Citi analysts see the very large monetary policy support from the ECB and meaningful fiscal response supporting recovery in the service sector that could be 50% faster than in 2008-09. Yet, it might take until the spring of 2022 to be able to argue that the Covid-19 crisis is truly over.      
  • GBP: UK June PMIs suggest UK economy is beginning to stir - UK flash services PMI for June prints at 47.0 mark but now suggests a much less widespread contraction compared to May or April (Consensus 40.0, prior 29.0). Meanwhile, the flash manufacturing PMI for June prints at 50.1, above the 50 no change mark for the first time since February (Consensus 45.0, prior 40.7). Employment continues to fall but the data suggests the UK economy has potentially moved off the bottom. Citi analysts expect a rebound in activity as the UK reopens, but the key question will be to what degree, and to what pace – the team does not expect a symmetrical recovery.  
  • AUD: June PMIs also up in line with the rest of the G10 - Australia’s flash June PMIs show the business activity index up at an impressive 53.2 vs 26.9 prior while manufacturing comes in at 49.8 vs 44 prior. Data reflects normalization in economic activity. The lift in both input and output prices is also welcome as it suggests a period of disinflation rather than deflation.  
  • SGD: Singapore’s May core CPI stays negative - Singapore May core CPI on a MoM basis comes in above consensus at -0.1% but below the 5Y average (+0.08%) for the fifth straight month. MAS/MTI expect inflation to remain “subduedwith both 2020 headline and core CPI seen averaging -1% to 0%. Citi analysts expect core inflation to trough in 3Q (-0.5%), but to remain negative through year-end, with the full year averaging -0.3%, and slightly less dovish vs MAS’ April implicit point forecast at -0.5%. 0 – 40% chance of another MAS downward re-centering in Oct-20 - With fiscal space possibly constrained against a disinflationary backdrop as unemployment rises, another October MAS re-centering (30 – 40% odds) cannot be ruled out, with food inflation needing to be closely watched as a source of upside risk

 

This is is an extract from the Daily Currency Update, dated June 24, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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