Risk rally extends on global recovery prospects, more optimism on EU’s joint fiscal response via its Recovery Fund

Risk rally extends on global recovery prospects, more optimism on EU’s joint fiscal response via its Recovery Fund                             

• USD: A strong start to H2’20 as risk extends gains on recovery prospects amid stronger data while ignoring the rising coronavirus tally in the US - gains are led by strong equity moves in China as the SHCOMP gains 5.7% in Asian time Monday, the biggest daily increase since 2015. Data last week supporting the Chinese recovery helps but it is a front-page editorial in China’s Securities Times on Monday reminding investors that fostering a “healthy” bull market after the pandemic is now more important to the economy than ever that underpins the Chinese stock rally. The jump in Chinese shares extends to global equity sentiment and to commodities, industrials  and precious metals. In FX, USD weakens while US yields edge higher.   

• USD: A stronger June US ISM non-manufacturing rebound also helps underpin the risk rally overnight. The index rises to 57.1 relative to consensus for 50.2 with business activity up at 66.0 while new orders rise to 61.6. However, diffusion indices (ISMs and PMIs) can rise quickly as activity restarts after temporary shutdowns and Citi analysts see little signs of activity returning to pre-COVID levels.   

• USD: Meanwhile, the Covid-19 situation in some of the biggest states in the US remains a concern. Hospitals in Houston, Texas are on track to be overwhelmed in approximately two weeks as coronavirus cases mount, according to Houston Mayor Turner and Austin’s mayor Adler who also issues a similar warning. On Saturday, Florida reports 11,458 new cases of the virus, which breaks its previous records and approaches New York's highest daily tally of 11,571 from April.  

ECB members optimism about euro zone recovery; Dutch (one of the frugal four) hint at a compromise on EU’s Recovery Fund         

• EUR: ECB's Villeroy and Knott more optimistic on the euro zone recovery with Villeroy noting that the French economy is pulling out of its slump at least as fast as expected a month ago, and maybe even a little faster. Knott also indicates in a speech Friday that "recent data solidifies the confidence in our baseline scenario with a more favorable balance of risks"

• EUR: More optimism on the EU’s Recovery Fund with Dutch PM Rutte (one of the frugal four) hinting at a compromise - says his priority is to retain the discount it receives in the next MMF 2021-27 and that conditions attached to the Recovery Fund should ensure that nations implement reforms to make their economies more competitive.    

Little new information in BoC’s Q2 Business Outlook Survey    

• CAD: The Bank of Canada’s Business Outlook Survey indicator declines to -7.0 in Q2 from -0.5 in Q1 while expectations of future sales measure fall to -35.0 from 22.0 in Q1 (35% more respondents expecting lower sales). Balance of investment intentions also falls to -30 from -12. Substantial weakness in the BoC’s Q2 Business Outlook Survey is not particularly surprising, as it more fully captures the effects of shutdowns related to COVID-19 and declining oil prices. But Citi analysts expect BOS indicators to gradually improve over Q3 and Q4 as activity returns.  ittle new information in BoC’s Q2 Business Outlook Survey

Week Ahead – Eurogroup meeting on EU’s Recovery Fund and UK to announce further fiscal measures; No changes to the RBA meeting                         

• EUR: On Thursday, the Eurogroup meets before an Ecofin meeting is held on Friday. By the end of this week, investors will likely have an idea on the prospects of a breakthrough regarding the EU’s Recovery Fund at the EC summit on July 17-18. Citi analysts base case is that the EU Recovery Fund will likely be broadly agreed upon, and be relatively close to the EC draft. The “Frugal Four” (Austria, Denmark, Sweden and the Netherlands) need to be appeased but Dutch PM Rutte already seems to be in a compromising mood. Politico reminds there are five sticking points for the Recovery Fund - size, the timing, the conditions, national allocation criteria, and new revenue sources.   

• GBP: This week in the UK, Chancellor Sunak will present the summer statement. Citi analysts expect a cut to the headline VAT rate (a 2.5pp reduction in the headline VAT rate for 12 months at a cost of GBP14.6bn). Media reports also suggest business rates could be adjusted. To address unemployment, the Treasury could give cash payments of GBP1000 to businesses that offer work experience placements to 16-24 year old trainees.  

• AUD: July RBA Monetary Policy Meeting: Citi forecast; no change, Previous; 0.25% - RBA officials have recently noted that the economic outcomes are not as bad as initially feared in the May SMP. That said, the Bank will continue to suggest that there’s still considerable amount of downside risks especially given the recent Covid-19 outbreak in Victoria state, especially if lockdowns are re-imposed. That said, the better-than-expected labor market outcomes means Citi analysts expect the Bank to upwardly revise up its economic projections in the August SMP.

• CAD: Canada Net Change in Employment (Jun) – Citi: 900k, prior: 289.6k; Unemployment Rate – Citi: 10.9%, prior: 13.7%; Hourly Wage Rate – Citi: 7.2%, prior: 10.0% - Citi analysts expect a strong rebound in employment of 900k jobs in June following a somewhat surprising ~300k increase in May. That said, there is considerable uncertainty around the magnitude of job growth with these expectations are partly based on trends seen in US employment data.

• CNY: Citi analysts expect China’s FX reserves to rise notably by US$30bn to US$3,131.7bn in June. CPI inflation might have edged up to 2.6%YoY in June, and PPI deflation might have eased to -3.2%YoY. Citi analysts expect M1 and M2 growth to moderate to 6%YoY and 11%YoY in June and forecast new loans at RMB 1.5trn in June and envisage new TSF at RMB 2.3trn in June.               

This is is an extract from the Daily Currency Update, dated July 7, 2020. Please approach a Citigold Relationship Manager if you would like more information.