The Investment Bank Outlook 18-05-2020
<p>In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.</p>
<h2>Citi</h2>
<p>Risk firmer on reopening narrative, but tensions remain…</p>
<ul>
<li>Reopening news seems to have driven the risk rally seen in Asia so far. We are seeing risk-on related USD weakness across the FX complex, with AUD and NZD outperforming in G10, while CAD is also taking note from stronger Brent and WTI prices which are both firmly above $30 now. In EMFX, ZAR and MXN are outperforming while in Asia FX, CNH and SGD are firmer. PHP lags the complex after outflows seen on Friday. Equities are on the front foot, with S&P futures at 2876 at the time of writing, with Asia indices lagging. Here are the latest conflicting headlines in markets:</li>
<li> <strong> Reopening & Fed:</strong> News that 75% of California has reopened according to the state governor, as well as a large US technology firm reporting plans to reopen more stores seems to have given risk sentiment a boost, outweighing cautious comments from Fed Chair Powell on Sunday who warned that the US recovery could take until 2021, but that most layoffs so far could be temporary. Powell also pushed back again on negative rates, somewhat more firmly than last week. The wild card still appears to be the risk of second waves. On this, he commented “assuming there is not a second wave of the coronavirus, I think you will see the economy recover steadily through the second half of this year.” The key question remains, what how do policymakers respond in the face of a second wave following reopening?</li>
<li> <strong> US/China:</strong> The Trump administration opened up a new front in the conflict on Friday by barring any chip-maker using American equipment from supplying Huawei without U.S. government approval. In Asia, this has caused volatility in regional semiconductor stocks, with Taiex under-performing in equities space. Scope for Chinese retaliation is now a real risk on the horizon, with the country’s “unreliable entity list” a possible method of targeting US companies. We have seen no reaction in FX markets to headlines here though. We covered this previously, noting China may use laws and rules like Cyber-security Review Measures and Anti-monopoly Law to investigate & impose restrictions on US firms. Most US companies included on China’s “unreliable entity list” may be small-sized firms such as US trading agencies, which will be pushed to the brink of collapse. That could serve as a “first-level” warning to the US over the Huawei ban before adding bigger companies.</li>
</ul>
<h2>RBC Capital Markets</h2>
<p><strong>Week ahead:</strong> The FOMC minutes (Wednesday) are the main release in an otherwise quiet US calendar. The FOMC meeting associated with these minutes showed very little change in the statement. So the minutes are unlikely to reveal much in the way of new insights. Indeed, Powell just spoke recently, which on some level preempted these minutes. His tone leaned on the sombre side with regard to the challenges ahead faced by the economy and we would expect a similar tone to be revealed here. Outside the US, the first indications of activity in May (EZ and UK PMIs; Thursday and Friday) will be the main focus. Canada has April CPI and March retail sales. There are no G10 central bank announcements due this week, but Turkey and South Africa both announce on Thursday.</p>
<p><strong>JPY:</strong> Japan’s Q1 GDP contracted 0.9% (consensus ‐1.1%), with private consumption accounting for a large part of the decline. Although this is relatively small contraction by international standards, it is important to note that GDP also collapsed in Q4 in Japan (due to the consumption tax hike in October). After two quarters of negative growth, Japan is technically in recession.</p>
<p><strong>EUR:</strong> Most European countries began to lift their lock-downs in the early weeks of May. The ‘flash’ PMI surveys (Friday) will have been carried out sometime around the middle of the month and therefore are likely to show some improvement as the easing of restrictions begins to allow some businesses, particularly in consumer‐facing services, to reopen. The extent of the improvement is likely to be small, however.</p>
<p><strong>GBP:</strong> Similar, though even smaller improvements are likely in the UK’s flash PMI releases (Thursday). This week also brings April CPI data, though there is a greater deal of uncertainty around the April CPI data than normal given the difficulty that the UK lock-down poses for the collection of prices. Changes in energy prices and recent falls in fuel prices along with changes to pre‐planned domestic energy water bills should combine to push CPI inflation below 1% y/y this month. The official measures of unemployment and employment in this week’s UK labour market report (tomorrow) will show only a partial picture of the impact of the current crisis on the UK labour market.</p>
<p><b><i>Disclaimer: The material provided is for information purposes only and shoul</i></b><b><i>d not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.</i></b></p>
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