Markets Weekly

14 August 2020

4 minute read

Week ahead

More indications of the effects of the pandemic on economies will be revealed in IHS Markit’s August flash purchasing managers’ indices (PMI) for the US, eurozone and UK due out next week. The latest US composite figure nudged up by 2.4 to 50.3 (where a figure above fifty hints at an expanding economy and one under fifty suggests a shrinking one). Furthermore, the services and manufacturing sectors seem to be growing now, at 50.0 and 50.9 respectively.

With containment measures being lifted, the eurozone July composite figure also improved, rising by 6.4 to 54.9. As in the US, both services and manufacturing appear to be starting to expand, at 54.7 and 51.8.

In the UK, a similar pattern could be seen, with July’s composite figure motoring up by 9.5 to 57.1. The services sector performed best with a 9.6 surge to 56.6, while manufacturing recovered by 3.5 to 53.6.

With retail sales galloping ahead by 13.9% month-on-month in June, we expect the momentum to be sustained when the next data are published on 21 August. That said, with year-on-year growth remaining weak and employment falling by the most in a decade in the three months to June, risks are to the downside.

The weekly US initial jobless claims data are expected on 20 August and will test investors’ belief in a speedy, V-shaped recovery. However, claims are set to remain elevated with containment measures reintroduced in some states following spikes in COVID-19 cases, high-speed data showing slowing consumption and government support measures due to run out soon.

Chart of the week

Prepare for dollar volatility

As the global economy braced for the COVID-19 crisis in March, the almighty dollar (USD) strengthened on safe-haven demand, an extra premium placed on liquidity and expectations that the currency would lead the recovery from lockdown.

However, the dollar has struggled since and broken significant trading levels against G10 currencies. There have been many reasons for this weakness.

On the domestic front, the country has struggled to limit COVID-19 cases, leading to some states reintroducing containment measures and recovery stalling. Political wrangling means there is still no agreement on much needed fiscal stimulus support. Furthermore, geopolitical tensions, like US-China tensions and election uncertainty, have weighed on the currency.

Sentiment towards the euro (EUR) and proxy euro currencies, such as the Swiss franc, has improved this year. The European Union’s recovery fund, totalling a record EUR750bn, has driven this, with the cohesion reducing the risk of fragmentation in the bloc.

The Bloomberg dollar index, measuring the currency against the euro, yen, Swiss franc, sterling, Canadian dollar and Swedish krona, started to weaken in May. That said, the index posted its worst July since 2010, with all G10 currencies appreciating against the USD. Given that the EUR constitutes 33% of the index, the currency has contributed to the move lower.

The dollar continues to be driven by many factors that do not necessarily imply one direction of travel. Alongside the recent headwinds, positive recovery and data surprises, such as the July nonfarm payrolls and better news in controlling COVID-19, could lift the currency.

Diversification and positioning for likely medium-term volatility, particularly around the US presidential election, seems appropriate.

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