Market Insights – June 8, 2020

Each week, a team of experts shares its market views with you.

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Essentials

Oil prices continued to defy expectations as the WTI neared USD 40 per barrel. They were lifted by Opec’s weekend announcement that it would extend its production cuts. The economic recovery has also been stronger than expected, which has provided a further boost.

Chinese imports were down 16.7% year on year in May, while exports fell just 3.3%, after rising 3.5% in April. This figure is slightly better than the consensus. Exports to the EU shrank in May, down 0.7%, but improved on the month-earlier decline of 4.5%.

The European Central Bank surprised the financial markets in a good way when it increased its asset purchase programme by EUR 600 billion and extended it to end-June 2021. The latest fiscal and monetary measures are a major step forward for the eurozone and show that political leaders want to strengthen coordination within the EU.

V for victory?

The May jobs report in the USA came as a big surprise. April had been a harsh month – more than 20 million Americans filed jobless claims as a result of the COVID-19 crisis. Most observers had expected the labour market to continue to worsen in May, with millions more jobs forecast to be wiped out and unemployment set to rise to nearly 20% of the working population. But fortunately this very gloomy outlook did not materialise. As lockdown measures were lifted in a number of states, close to three million jobs were added over the month. This pushed the unemployment rate down to 13.3%. The outcome was better than anyone had hoped for. It shows that companies are starting to believe that output will pick up quickly and don’t want to wait before rehiring employees who were let go at the start of the crisis. This improvement in the jobs market is great news for the US economy and the global economy as a whole. If it continues, it should help to trigger a virtuous cycle of renewed US consumer confidence and rising consumer spending. It also means that we could see a V-shaped recovery. Most economists – including us – hadn’t dared to hope for anything more than a U-shaped recovery, i.e. a very gradual acceleration in output. Financial markets didn’t get it wrong and welcomed these figures, rallying sharply over the week. But can they keep up this trend given that they have already made substantial gains since mid-March? The momentum both within and among asset classes suggests that the rebound will continue over the short to medium term. The stock-market uptrend has become more widespread recently, and lower-quality bonds, commodities and peripheral and emerging-market currencies have also moved upwards. We’ll nevertheless have to keep a close eye on the risks that could derail this potential V-shaped recovery. There could be profit-taking if geopolitical risks materialise, if there is a second wave of infections or if governments and central banks rein in their stimulus too quickly.

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