Markets Weekly

19 June 2020

4 minute read

Week ahead

The latest pandemic developments and data on its economic impact will heavily influence investor sentiment – especially as fears of a fresh wave of COVID-19 emerge in China.

On Tuesday, June’s IHS Markit flash purchasing managers’ indices (PMI) for the eurozone and UK are published. In May, the services sector showed encouraging signs in both areas. The eurozone figure shot up 17.0 points to 28.7 (where a figure below 50 indicates economic contraction) and the UK reading surged 15.5 points to 27.8. Manufacturing somewhat recovered too, with the data up to 39.5, from 33.6, and 40.6, from 32.9, respectively.

In the US, the impact on the economy of lifting quarantining measures should be reflected in June’s IHS Markit’s flash PMIs for services and manufacturing. Last month’s readings hinted at recovery, with the sectors hitting 36.9, from 27.0, and 39.8, from 36.9, respectively.

While the final Q1 US gross domestic product figure is expected to be -5.1%, the figure covers a period when full quarantine measures were in place for part of the time. With many states reopening in May and the restoration of 2.5m jobs that month, consumption may fare better in the US. The market anticipates 3.0% month on month, recovering from the record low of -13.6 in April. The initial jobless claims data on Thursday will further show the success, or otherwise, of reopening activity.

Chart of the week

Flipping the switch

Strict lockdown measures have dramatically curtailed output. We have seen the majority of countries report record falls in gross domestic product. How quickly can they bounce back?

The Chinese US and UK consumers had been the driving force behind economic growth before the crisis. However, containment measures strongly impacted economic activity (most notably in the dominant services sector), causing workers to be laid off, or furloughed, as employers cut costs and postponing purchases from willing and able consumers.

It is therefore unsurprising that retail sales in China, the US, UK and the eurozone plummeted in months corresponding to containment measures. There appears to be slight optimism of a recovery in retail purchases as quarantining is eased, with the US for the most part resuming normal activity, the UK reopening non-essential shops and many countries in Europe continue to unwind the restrictions on normal life. Not to mention the accommodative global monetary and fiscal policy stance.

China was not only the first country to implement lockdown measures, but was also the first country to lift them. This provides a template as to how consumers might behave in a post lockdown world.

Chart of the week

While the initial months have seen stronger retail sales readings, they remain in the red on the same period last year. Even after seemingly impressive US May retail sales (up 17.7% month on month), sales were still down 6.1% from last May. The same can be said for the UK, where retail sales rose 12% on the month, but down 13.1% on the year.

It will likely take time for employers to rehire workers and it’s probable that not every job lost will be recovered. Also, consumers who are ready to resume purchases, may hold off until confidence over the future outlook is restored.


China’s recovery blueprint

China was one of the first major states out of lockdown. Can other countries learn from China when easing restrictions and managing the recovery?

Previous editions of Markets Weekly

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