~Weekly Overview~

ECB, OPEC+ and Non-Farm Payrolls

  • Brazil surpasses Italy as the country with the third most deaths in the world. New York City reports no confirmed fatalities for the first time since March as the U.S is all-in on reopening. The study that showed a malaria drug (hydroxychloroquine) raised the risk of heart side effects and death when used to fight against Covid-19 has been retracted. Meanwhile, low-cost airlines are bullish in traffic targets for the vacation period, expecting to restore as much as 60% of normal capacity during summer, increasing to 80% over winter.

  • OPEC+ is set to extend cuts for another month after Iraq’s tentative deal on compliance with quotas. Iraq, a habitual laggard, will have to compensate for past failings which means that Iraq will have to cut its production in August and September in 1.3 mln barrels a day. Taking into account oil is a necessary source of revenues for Iraq to rebuild its economy after decades of war and sanctions, nothing should be taken for granted until formal communications take place. WTI crude oil trades at $38.9, a three-month high.
Source: Bloomberg
  • With just a few weeks until the crucial June 30th deadline and with Johnson repeatedly ruling out asking for an extension, trade negotiations are set to end today without breakthrough. Key disagreement are over measures to ensure a level competitive playing field and access to U.K fishing waters, among the most fertile in Europe.

  • U.S Non-Farm Payrolls came at +2.5 million in May beating expectations of a 8 million layoffs figure. The U.S economy created 2.5 million jobs in the middle of the pandemic. Figures for May suggest the recovery in the U.S may be much faster than intially expected . Large employment increases occurred in leisure and hospitality, education, health services and retail trade while government employment continued to decline sharply.

  • Widespread protests against racism and use of excessive force by police officers in the U.S triggered by the murder of George Floyd by a Minnesota police officer, will not have an impact on financial markets unless massive demonstrations cause a second wave of Covid-19 cases in the U.S with economic consequences. During previous comparable events such as the protests after Martin Luther King’s assassination in 1968, the S&P500 rallied.
Source: FT

ECB Increases its Pandemic Emergency Purchase Programme by 600 Billion Euros

Lagarde revealed downward revisions to the ECB’s economic projections in GDP growth and inflation in the Eurozone. In 2020, the bloc will see a contraction of 8.7% in their GDP and a rebound of 5.2% in 2021. In their more severe scenario, output could shrink as much as 12.6% this year. Inflation will remain far below the 2% target of the European Central Bank bottoming at 0.3% in 2020.

Source: FT

To address these worsened estimations, Lagarde has overdelivered in the expansion of the Pandemic Emergency Purchase Programme. Economists were expecting an increase of 500 billion euros. The Central Bank said the programme will be conducted in a flexible way over time, in various asset classes and jurisdictions. The proceeds from maturing debt will be reinvested until 2022.

Source: FT

Once again, Europe faces a big debt crisis with interest rates near zero as unexpected additional government spending has been needed to equip public health systems with medical instruments to address the pandemic and to avoid a more severe economic depression. Deleveraging applying austerity measures will be needed if Europe wants to build a stronger economy out of this crisis.

The EURUSD index continues to rally as risk on prevails in the market and the ECB overdelivers in the PEPP. The US dollar, the world reserve currency, strengthens in volatile and bear periods as investors hedge. As the investors recover their confidence, they tend to shift to assets with higher risk premium in search for higher returns. The USD weakens as a result.

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

Source: Flinviz