News & analysis


Sterling trades on the back foot this morning despite headlines in The Telegraph suggesting that an exit strategy may be set out by the UK government in the coming days, although it won’t be back to business as usual. The reason behind such moves stems from the US, where it is believed that the Trump administration are weighing further tariffs on China to punish Beijing for its handling of the coronavirus outbreak. These headlines come at a time where growth prospects are already fragile for the global economy and are weighing heavily on sentiment. The news comes at a time when sentiment is expected to be boosted by news of exit plans. There is no data scheduled for release today, while this week’s focus will be on the swathe of PMIs set to be released for April and the upcoming Bank of England meeting on Thursday.


The euro closed higher against the dollar on Friday but is trading on the back foot this morning after renewed tensions between the US and China came to light and triggered safe haven flows into the dollar. Virus deaths in Europe continue to decline, with Italy reporting the lowest daily death toll since the lockdown started. On Friday, Italy’s Prime Minister Giuseppe Conte publicly apologised for delays in payments assigned to struggling families and businesses, and with virus cases declining, Conte is put under pressure to speed up the reopening of the economy. The first step of easing the containment measures in Italy will start today after two months of lockdown. Manufacturing and construction will be the first to restart, while retailers and museums will reopen later in May. The European Central Bank will be put to the test on Tuesday when Germany’s constitutional court will rule on the legality of the ECB’s QE programme. While the ECB itself is not subject to German law, the Bundesbank is. As the largest shareholder in the ECB, a rejected ruling from the court would lead to no more support from the Bundesbank, which would take the eurozone into uncharted waters. This morning’s manufacturing Purchasing Managers’ Index from the eurozone plunged to 33.4 in April from 44.5 in March, not far off from the consensus and the initial reading, but make for grim readings nonetheless. The Spanish PMI slumped to 34.0 while Germany’s printed at 34.5. The manufacturing sector took an unprecedented hit from the widespread lockdowns, but in the face of gradual easing of measures throughout the eurozone starting with manufacturing, things may begin to pick-up in the upcoming readings. Notably, each PMI is taken on a month-on-month basis, so markets may begin to see manufacturing PMIs print above 50 in the coming months, although the expansion in the sector would be coming from a low base.


The dollar closed the week with a mixed performance. The greenback weakened against the majority of the G10 basket but rallied against the petro-currencies, CAD and NOK, along with riskier currencies like AUD and NZD. US President Donald Trump’s threats to reignite the US-China trade war has triggered a risk-off move across markets in this morning’s session, with the FTSE 100 falling 2.5% in London and the Nikkei index sliding by over 2.8% in Japan on Friday. The news has induced fresh haven flows into the dollar and yen this morning as Japan celebrates Greenery Day. President Trump hinted at the possibility of imposing retaliatory tariffs on China over their response to the pandemic. The risk-off sentiment wasn’t helped by US factory output shrinking at a record pace of more than 20 points, with the index falling to 27.5. Manufacturing employment plunged to a 70 year low, also printing at 27.5. The indices suggest contraction with a reading below 50. Over the weekend, Federal Reserve member Robert Kaplan reported to Fox that the economy requires more fiscal stimulus to combat the “historic contraction” that followed the virus outbreak and lockdown measures and said that “rates are going to stay low for longer”.  Comments by Kaplan reiterated the argument made by Fed chair Powell on Wednesday.


The loonie was down over percentage point on Friday’s close against the US dollar despite crude oil prices trading relatively stable on the day. A barrel of WTI due for delivery in June traded between $18 and $21 with Brent also trading in a three dollar range of $25 to $28. Friday’s percentage point slide in the loonie came after Finance Minister Bill Morneau made the surprise announcement that Tiff Macklem, former BoC Senior Deputy Governor under Mark Carney, would be the next Bank of Canada Governor. Although the market widely expected the position to be given to the incumbent Senior Deputy Governor, Carolyn Wilkins, the initial reaction to the announcement didn’t prompt the market reaction. However, when questioned by reporters about his stance on negative rates, Macklem’s unwillingness to write them off gave traders the green light to start selling the Canadian dollar. However, it must be noted that the incoming  Governor did acknowledge the disruptive impact of negative rates however and stated he was  “comfortable with a lower bound of rates at 0.25%”. This morning the loonie trades relatively stable against the dollar despite the decline in oil prices. This week, investors’ eyes will be fixated on Friday’s labour market report to guide their forecasts for the economic damage of Covid-19 on the Canadian economy. Expectations currently sit at a rise in the unemployment rate from 7.8% to 18.2% in April.


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