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Weekly Markets Round-up: 29 June - 3 July 2020

Black Tuesday

The last week has seen a bit of a kerfuffle about what kind of currency the Pound Sterling (GBP) is. Kamal Sharma, a Bank of America currency strategist, released a report on Tuesday advising clients to view the GBP as an emerging markets currency. The reasons? Increased volatility, less liquidity as well as the downtrend in value versus other major currencies over the past few years. At the other end of the pitch is hedge fund managers such as Stephen Jen who argues, by virtue of being a reserve currency, the GBP is and will continue to be a developed currency.

I have the privilege of watching this unfold from Ireland and, complicated history aside, I am bullish about Britain’s prospects. Unlike an emerging market, the economy is well-diversified, not overly regulated and its currency continues to be used as a reserve. Sharma points to the fiscal deficit, as well as the deficit on the Current Account, as making the GBP look more like the Mexican Peso rather than the Euro.

However, the widening fiscal deficit has been observed across all economies by virtue of the pandemic, and the deficit on the Current Account has been steadily falling relative to GDP. The increased implied volatility on the GBP seems largely to be the result of bad faith on the EU’s part. Brussel’s choice to complicate Brexit negotiations has led to dreaded uncertainty. The increased volatility is not a result of a drastic change in the fundamentals.

The UK economy is as strong as ever and will continue to be a leader in sectors from financial services to science. Regarding the latter, the absence of EU grants may induce universities to finally focus all their efforts on producing research with viable economic potential rather than research for research sake as oftentimes is the case in Ireland. In effect, GDP will remain buoyant and not shrink as Sharma suggests in his paper.

To my mind, if any currency ought to be downgraded it is the Euro. The uptick in fiscal deficits across the Eurozone has been quite a bit starker than the UK’s deficit and prolonged quantitative easing; it ensures that once the pandemic is over, tough decisions will have to be made. It is certainly conceivable that there will be some sort of Euro crisis post-Covid once companies start paying back their debt and the ECB must return Europe to rate normality. The failure to achieve monetary and fiscal union over the past decade ensures the Euro may soon see the fall in liquidity and devaluation the GBP is seeing. Additionally, Europe’s engine, Germany, is the epitome of Eurosclerosis. It seems to me that once ideology is set aside and a 'first principles' approach is taken, the Euro is a lot worse off than the Pound. Assuming the Euro stays on its current road, there are going to be a lot more Black Tuesdays ahead for it than the Pound.

By Robert Tolan - University of Dublin, Trinity College

This Week in Markets: 29/06 to the 03/07

Overall, it was another bullish week, but investors are still caught in a tug of war between improving economic data and worsening case numbers.

Source: MarketWatch

The charts showed a similar trajectory for all three major US indices. Early in the week, the mood was bullish, especially on Tuesday, when the S&P finished Q2 with a higher gain than any year since 1998, while the other markets broke similar records. Investors also reacted positively to a better-than-expected Consumer Confidence Index result at 98.1. Meanwhile, in China, the Purchasing Managers Index also beat estimates and was in expansionary territory. This data and some others announced this week, supports a strong, but perhaps slow economic recovery.

Source: MarketWatch, showing data from 29/06 to 03/07.

On Wednesday, the rally continued after Pfizer and BioNtech released positive preliminary data from a vaccine test. This outweighed the negative sentiment from the ever-growing number of daily cases stateside.

Thursday was filled with several key releases. The US Labour Department's non-farm payroll statistics indicated that 4.8 million jobs were created in June, far above estimates, making June 2020 the best month for job creation since records began. A very bullish signal, although it must be taken with a pinch of salt, as the recent rollbacks in reopening are not represented in those figures. The same statistics also implied that unemployment benefit claims barely fell from the week before, a worrying sign. Increasing numbers of COVID-19 cases across 40 states also took the spring out of the market's step. Finally, Moderna announced a delay to their Coronavirus vaccine trials. This added uncertainty to the market, as a vaccine is still considered the holy grail for recovery.

The US indices had the highest return partly because they avoided a slight sell-off on Friday due to the Independence Day holiday, which reduced trading volumes in most markets worldwide.

In Europe, the markets were mixed. The FTSE closed slightly down on the week while the DAX and EURO STOXX closed with a very positive return. The FTSE was hampered by negative domestic news. While the EU markets more closely followed developments in the US.

Source: MarketWatch, showing data from 29/06 to 03/07.

On Wednesday, all markets reacted positively to the news of vaccine trials explained above. A similar reaction occurred on Thursday in response to US jobs data. However, the FTSE lagged behind due to very negative news from the Chamber of Commerce regarding domestic economic conditions in Q2. Several negative stocks also hampered the FTSE’s progress.

The FTSE ended the week poorly, as major oil producers were affected by continued low prices, and reports came out suggesting a lack of tax cuts to be announced in the Chancellor's speech next week. The DAX and EURO STOXX also declined on Friday, due to reduced trading volumes and rising case numbers in the US.

In APAC, the markets were also mixed. The Hang Seng and ASX closed reasonably positive, but the Nikkei was negative and had a choppy week.

On Monday, the APAC markets fell as US cases surpassed 10 million. This followed from the losses on Wall Street the Friday before. The markets then rallied on Tuesday due to positive data from China and the US.

Wednesday saw the release of Japanese data from the central bank that was very bearish, as it showed manufacturing sentiment falling to the lowest levels in more than a decade. The Hang Seng was also closed for a holiday on Wednesday.

Source: MarketWatch, showing data from 29/06 to 03/07.

As in Europe, the positive non-farm payroll data boosted markets early Friday morning. But rising cases in Tokyo and the US had a negative effect.

Overall, it was a mostly positive week led by several good data releases, but some markets suffered from negative domestic news. The rising case numbers in select parts of the world are still causing uncertainty and will probably continue to do so in the weeks ahead, until the numbers peak.

By Charles Heighton - VP of Trading at King’s Global Markets

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