On Thursday, April’s prelim private sector PMI numbers from Asia and Europe delivered yet another reality check for the global financial markets.
As expected, service sector activity took the biggest hit, with lockdown and containment measures shutting down all but non-essential businesses.
When we look at the numbers, the economist forecasts continue to stand out as much as the record low PMIs…
The Eurozone’s Services PMI slumped from 26.4 to 11.7. Economists had forecast a fall to 23.8. We had talked of anything sub-20 being considered as alarming.
According to the April PMIs, only Manufacturing PMIs managed to avoid sub-20 across France, Germany, and the Eurozone.
For the U.S, things are unlikely to be much better…
When we then consider the IMF’s economic growth forecasts, a 3.3% contraction in the global economy for 2020 looks far too upbeat. We would prefer the ISM numbers next week, for a better picture for the U.S, however…
Market Omens
Not only have private sector PMI numbers dwarfed levels seen during the global financial crisis, but so have unemployment numbers.
Then throw in an unprecedented fall in WTI futures into negative territory.
If investors needed warning signals to run for the hills, surely the combination of all the alarm bells in a 1-week period would be enough.
Apparently not…
Looking across the global equity markets, the Dow futures was down by 23 points at the time of writing, with the DAX30 sitting at 10,386.74. The DAX was only down by 15.4% year-on-year…
Throwing in the fact that central banks have all but negative territory to visit on the interest rate front, there are interesting times ahead.
Fiscal and Monetary Policy Support
We’ve seen central banks and government attempt to combat the effects of COVID-19 on the respective economies.
In reality, however, getting people back to work will need to happen quickly to allow both fiscal and monetary policy moves to take effect.
Consumer confidence has unsurprisingly fallen off a cliff, so it’s not surprising that consumption has also tumbled.
The optimists will be talking of a sharp pickup in hiring and a return to business as usual.
For a v-shaped economic rebound, however, hiring is going to need to be gathering pace going into May.
It’s plausible for such an outcome, but it is also an optimistic outlook. When considering the current levels in the equity markets, a 3% fall in a major bourse in response to WTI futures slumping into negative territory indicates a significant disconnect…
Free money is undoubtedly propping up the likes of the S&P500 and the Dow. One does have to ask, however, when even throwing free money at an investment looks just too risky.
What Lies Ahead?
We will need to see the weekly initial jobless claims numbers in the U.S begin to ease off from 6m levels…
For the global financial markets, easing in lockdown measures will also need to have zero impact on the daily COVID-19 numbers.
Any hint of a sudden increase in new cases and expect pressure to build to reintroduce containment measures.
Such an outcome would be too dire for the markets to consider. From an employment perspective, you would also begin to see more sustainable sectors begin to lay off in large numbers.
In this eventuality, any expectation for a late 2020 recovery would be a bold one.
From a fiscal and monetary policy perspective, we will also need to see what Banks and governments have left in the tank.
In the U.S, the November Presidential Election is one hurdle to also overcome. There is then the risk of a buildup in geopolitical risk as countries look to restore growth and that could include tariffs…
Then there is the EU project and, let’s not forget, the need to reopen borders… The latter is certainly going to be a hot topic in the coming months. Few governments will want to risk a fresh wave of new COVID-19 cases from opening borders too early.
So, while we look at corporate earnings and the latest stats and crude oil prices, there is a lot more that will come into market purview in the coming weeks and months.
Volatility, well, it’s not going anywhere any time soon….
For the EUR
At the time of writing, the EUR was down by 0.30% to $1.07903. That’s quite a tumble from early March’s current year high $1.14950.
Can the Dollar reach parity against the EUR? If the EU project comes under fire then no doubt. And the chances of the project coming under fire will rise as member states attempt to keep borders closed…
After all, freedom of movement was one of the key issues that Britain faced as it left the EU.
This article was originally posted on FX Empire