~Weekly Overview~

Hong Kong, EU and Oil

  • Cases continue to soar in Brazil with daily deaths at 1,039, surpassing that of the U.S as Bolsonaro calls for the economy to reopen. The U.S reaches the grim milestone of 100,000 deaths. South Korea reported the biggest spike in cases in two months. Germany’s infection rate dropped below an important threshold while Europe continues its decreasing trend.
  • The Ifo Business Climate for Germany rose to 79.5 in May from an all-time low of 74.2 in April above expectations of 78.3. Special emphasis should be placed at companies’ expectations improvement (80.1 vs 69.4 in April), a considerable rise as gradual easing of lockdown measures continues. Still, companies assessed their current situation slightly worse compared to the previous month.
  • Boris Johnson faces a political crisis in the Conservative Party after his influential adviser Dominic Cummings broke the lockdown rules in making a trip across England. Boris Johnson ruled out official inquiry into the actions of Cummings even though 44 Tory MPs seek his dismissal so far and the government approval rating is in free fall. Cummings is the person behind the “Vote Leave” campaign in the Brexit referendum and the “Get Brexit Done” slogan that helped the Conservatives have a majority in the last elections. Cummings is of special importance in the Brexit negotiations and, therefore, in the GBP market.
  • Crude oil extended losses after the American Petroleum Institute report reported U.S oil stockpiles rose 8.7 million last week (7.928 million according to the Energy Information Administration). After two consecutive weeks of inventory declines, this could be an indication that the supply gut is still there after the massive supply cuts by the OPEC+ and the reduction in U.S rigs due to profitability. Oil rallied about 70% this month although the recovery remains fragile. Producers could be prompted to restart production with higher prices and Russia, although it reiterated their cooperation on the agreement, it stated it is willing to scale back the emergency cuts.
Source: Trading Economics
  • Weekly jobless claims eased to 2.123 million, slightly above market expectations of 2.1 million. However, this is the lowest level since the coronavirus crisis began. Total reported since March 21st up to 40.7 million, the 25% of the U.S workforce. In the week ended May 23rd, Washington, Florida, California and New York reported the largest decreases in jobless claims, meaning people are getting back to work already.

Hong Kong: The heat point of the Trade War

Mike Pompeo, the U.S Secretary of State, said the U.S no longer considers Hong Kong autonomous from China, given facts on the ground. The National Security Law proposal from mainland China in the National People’s Congress targeting subversion, terrorism and foreign influence in Hong Kong violates the “one country, two systems” model, that guaranteed a high degree of autonomy to Hong Kong from Beijing for 50 years after Britain returned it to China. This prompted a fresh round of protests in recent days.

The U.S administration is deciding their response to this Beijing’s decision which could threaten to end the special trade status Washington granted Hong Kong compared to mainland China. Trump will announce future action in today’s press conference and this could mark the end of his cautious approach to Beijing.

The Hang Seng index, Hong Kong’s benchmark, dropped on Thursday a 0.3%, uncorrelated with the rest of the Asia-Pacific indices.

The UK government said yesterday that could offer paths to citizenship for people born in Hong Kong before 1997 and extend Hongkongers’ visa rights if China pursues security law.

The EU Stimulus Package: Further Fiscal Integration

The European Commission unveiled an unprecedented 750 billion euros stimulus package to tackle the recession caused by the Covid-19 pandemic. Negotiations will focus almost entirely in the balance between loans and grants. Austria, Denmark, the Netherlands and Sweden have signaled their resistance to handing out too much in grants and said they will look closely at the conditions attached to any aid. Nevertheless, they were willing to discuss around the framework and it seems they accept joint debt issuance as a way to finance this stimulus plan.

As said before, to fund the package, the EU would borrow up to 750 billion euros on financial markets. Spain and Italy stand to receive the biggest aid package, in line for 77 and 82 billion euros in grants and 63 and 91 billion euros in loans respectively. France and Greece will also be big beneficiaries of this stimulus package. The debt will be jointly repaid over 30 years starting in 2028.

The stimulus plan seeks to unlock private investment in strategic areas and healthy companies. They are planning to allocate 31 billion euros in an instrument to take equity stakes in healthy companies, hoping to unlock 300 billion euros in additional private investment and 15 billion euros to another fund to make the EU self-reliant and resilient in strategic areas, unlocking 150 billion euros in private investment.

The European Central Bank is expected to step up its emergency assets purchases within the Pandemic Emergency Purchasing Programme (PEPP) by €500 billion to “rebuild the 19-nation economy”.

As usual, I leave here the S&P500 1-week performance heat map and a link to the FT Coronavirus Tracker.

Have a good weekend!

Source: Flinviz