Friday, June 5, 2020

Week ahead: what will the Fed do?

NBHM Research Team

Global stocks rallied last week as market participants continued to focus on economic recovery. Data released during the week showed that business activity was starting to pick up in most countries. For example, the services and manufacturing PMI data from China moved into growth territory. Similarly, in Europe and the US, the PMIs showed some improvement.

The biggest news from the United States was on the protests that were going on throughout the week. Protestors were demonstrating the killing of George Floyd, an unarmed black man, by a police officer. The nonfarm payrolls data showed that the unemployment rate declined to 13.3% as the economy added more than 2.5 million jobs in May.

In Europe, the European Central Bank (ECB) left interest rates unchanged and boosted its asset purchases by an additional €600 billion. Similarly, the Reserve Bank of Australia and Bank of Canada left rates unchanged.

US dollar: The US dollar was the worst-performing currency in the developed world. The dollar index, which measures the performance of the greenback against a basket of currencies, declined by more than 2%. The reason is that demand for the dollar has weakened since most economies have started to reopen. This week, the biggest dollar-related news will be the Federal Open Market Committee (FOMC), which will deliver its interest rate decision on Wednesday. Analysts expect the bank to leave interest rates and the quantitative easing program unchanged. Other key data from the US will be the JOLTS job openings, CPI, PPI, and consumer sentiment.

Gold: Gold’s momentum eased last week as investors moved back to stocks, which are doing relatively well. The price also declined because of the waning demand from India, its most important market. Still, the price is in an overall bullish trend and on the daily chart, it is forming a bullish pennant pattern. This means that the price may resume the upward trend in the near term. This week, the biggest catalyst will be the decision by the Federal Reserve. The daily chart below shows the bullish pennant that has been forming.

NBHM weekly overview

S&P500: The S&P500 index rallied last week as momentum in stocks continued to increase. The ultralow interest rates and the decision by the ECB to boost asset purchases helped. This week, the focus will still be on the ongoing recovery and several earnings reports. Notable companies that will release their earnings are Stitch Fix, Thor Industries, Caseys, Brown Forman, Five Below, HD Supply, Signet Jewelers, Lululemon, and Korn Ferry among others.

GER30: The DAX index was among the best-performing indices in Europe last week, gaining by more than 2%. The index rallied after the German government reached a funding deal with Lufthansa. The government will provide a bailout worth almost $10 billion and take a substantial stake in the company. In exchange, Lufthansa agreed to give some of its landing and take-off slots in Munich and Frankfurt. The index also rallied after the government agreed to another stimulus package worth more than 100 billion euros. This week, it will move mostly on news regarding the global recovery and government support.

Australian dollar: The Australian dollar has been the best performing currency in the developed world lately. It soared mostly because of the overall weaker US dollar, emerging China, and the relatively less dovish central bank. This week, the currency will move mostly because of two key reasons. On Tuesday, we will get the business confidence data from the ANZ bank. Analysts expect the confidence to show some positive signs. On the following day, we will get the consumer sentiment data from Westpac bank followed by home loans data.

Euro: The euro was among the best performing currencies in the developed world last week. This is because data from the region showed that the region was bouncing back. The interest rate decision by the ECB provided more catalysts. As a result, the currency is trading at its highest point since March. This week, the euro will move because of the German export and import data, the eurozone GDP data, and the bloc’s industrial production numbers. The chart below shows the significant jump in the euro last week.

NBHM weekly overview

Canadian dollar: The Canadian dollar soared last week because of rising crude oil prices, overall weak US dollar, and the falling number of new coronavirus cases. The currency is trading at the highest it has been against the USD in the past three months. This week, we will be looking at several key economic data from the country. Today, we will get the May housing starts and building permits followed by corporate profits for the first quarter. Finally, on Friday, we will get the capacity utilization rate.

British pound: The British pound rose last week even as the fourth round of Brexit talks, as expected, ended without a deal, raising chances of a no-deal Brexit. This week, the pound will react to the industrial production data and the retail sales numbers from the UK. Latest developments on Brexit will also likely move the sterling.

Other key data to watch this week will be the Japanese overtime pay numbers, first quarter GDP, large manufacturing conditions, and capacity utilization. We will also get the Chinese CPI and trade numbers, and the Norwegian inflation data.​

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