Essentials

Although Chinese imports were down 14.2% year on year in April, exports fared much better than expected: they rose 3.5% after dropping 6.6% in March.  Exports to the USA and EU were hit hardest by the COVID-19 crisis, while exports to the Asean region have gained ground since March.

US unemployment peaked in April, coming close to 15% – well above the highs reached during the 2008 financial crisis. But the difference this time around is that most workers have been furloughed and should therefore be able to get back to work quite quickly as economic activity gradually picks up in the coming weeks.

Germany’s constitutional court has given the ECB three months to demonstrate that its purchases of government bonds between 2015 and 2018 were compatible with its mandate. This news didn’t really rattle the markets, probably because the European Commission pointed out that EU courts take precedence over German courts.

A line in the sand?

Despite Chairman Thomas Jordan’s denials in Switzerland’s Sunday press, the SNB may have set a new limit for the EUR/CHF exchange rate at 1.05 – at least for the short term. Although financial and forex markets have been extremely volatile since the pandemic hit Europe, the euro has remained surprisingly – not to say suspiciously – stable against the Swiss franc. Since mid-April, the curve has flat-lined at CHF 1.0520 despite the large injections by the SNB. And Mr Jordan has certainly increased the dosage in response to the COVID-19 crisis. To prevent the Swiss franc from skyrocketing, which would weigh heavily on Switzerland’s export-dependent economy, the SNB intervened repeatedly on the forex market throughout April. Our central bank’s balance sheet grew by CHF 40 billion to CHF 800 billion, an all-time monthly record. And the rise in sight deposits at the SNB during the first week of May suggests that this trend will continue. Central bankers are working alongside the federal government to try and limit the economic damage of the crisis and ensure that the economy can pick up again once the pandemic has ended. At the start of the year, the US Treasury had threatened to label Switzerland a currency manipulator, but that is now a distant memory. The urgency of the situation has prompted policymakers in most developed countries to once again stray from the hard line that was the norm before the 2008 crisis. It’s hard to find fault with the SNB when large amounts of money are being pumped into the economy in the USA, the eurozone and Japan. There’s no guarantee that the euro will remain around the CHF 1.05 mark. Since January 2015, we’ve got used to interventions that aim to rein in the franc over the longer term rather than keeping it above a symbolic threshold. On top of the short-term market volatility, the sharp rise in European sovereign debt as a result of the current crisis will raise major challenges for the euro going forward. Unless there is some unexpected decision to mutualise this debt in the eurozone, the franc could remain strong, and we recommend hedging against the euro in Swiss-franc portfolios.

Oil market rebalancing quickly

The oil market had an unforgettable start to the year – but for all the wrong reasons. Not only have prices been extremely volatile, but they also defied expectations by turning negative. Oil has joined the likes of natural gas and electricity, which have also been through similarly rocky periods for the same reason: a lack of storage capacity.

But over the past three weeks, the trend has changed, and volatility is mainly to the upside. Inventories are expanding more slowly than investors had feared because production has been cut more quickly than expected as producers fight for survival and slash their costs. There is very little visibility in the short term. We still think that the market will remain volatile and that a tactical approach is needed. Futures curves have steepened, making positions expensive over the long term. For the time being, inventories are still huge and will have to be used up, which justifies a resistance level of USD 35 for the WTI. The rebalancing process will take several months. Looking further ahead, the current lack of investment will have a major impact on output, pointing to much higher oil prices in 2021.

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