Broadly Softer Dollar amid More Hopeful Investor Mood

May 26, 2020

The evolution of the Covid-19 pandemic remains highly uncertain, but investors have chosen hope over fear at least for a day or so. Economies are being reopened at varying speeds, and there has been some encouraging news regarding vaccine development. Released economic data have confirmed improvement in many cases, meaning a slower implosion rather than a return to positive growth.

As a prime beneficiary of safe-haven demand, the dollar has relinquished gains, falling overnight by 1.8% against the peso, 1.3% versus the kiwi, 1.1% relative to the Australian dollar, 1.0% vis-a-vis sterling, 0.8% against the loonie, 0.5% versus the euro and Swiss franc and even 0.2% against the yen, which also had benefited previously from a flight to safety.

The move out of fixed income investments saw 10-year sovereign debt yields climb today by 5 basis points in Germany, 3 bps in the United States and a basis point in Great Britain.

It’s been a banner day for the price of oil (up 2.7% and above $34.0 on WTI for the first time since early March). But the price of gold settled back 0.6%.

Equities have been the major winner in the revival of hope, with markets around the Pacific Rim closing with gains of 2.9% in Australia, 2.6% in Japan, 1.9% in Hong Kong, 1.8% in South Korea, 1.5% in New Zealand, 1.2% in Singapore, 1.1% in Taiwan and 1.0% in China. Share prices in Europe have risen thus far today by 1.2% in the U.K., 1.1% in France, 1.1% in Spain, 0.7% in Italy, and 0.6% in Germany. U.S. stock futures are up.

On the central banking front, the People’s Bank of China required reserves ratio on large banks was slashed one and a half percentage points to 11.0%, even more than last month’s cut on smaller banks.

Britain’s monthly distributive trades survey index recovered 5 index points to -50 in May but remained far beneath the reading of -3 in March.

German consumer sentiment rose 4.2 index points to -18.9 in June after tumbling 25.4 index points to a record low in May.

South Korean consumer confidence rose to a 2-month high of 77.6 in March from 70.8 in the prior month. The March level is just shy of 78.4 in January but well down from 104.7 last November.

Factory output in Singapore, which had soared 21.7% in March, unexpectedly rose again in April, this time by 3.6% to 13% above its year-earlier level.

Danish retail sales rebounded 0.4% in April from a 4.6% slump in March, and the 12-month rate of decline was shaved to 2.6% from 4.9%.

To be sure, many other reported data today faltered further.

  • Japan’s all-industry index in March, a monthly proxy for GDP, plunged 3.8% on month and 3.4% on year in March.
  • Switzerland reported its largest monthly trade surplus in April (CHF 4.327 billion) since 1950 due to a colossal 21.9% dive in imports.
  • The estimated drop in Singapore GDP last quarter was revised up more than twofold to 4.7% on quarter, resulting in the first on-year decline since the second quarter of 2009.
  • Norwegian consumer confidence swung below zero to a reading of -7.6 this quarter from +4.7 in the first quarter and +14.9 in the spring of 2019.
  • Mexican GDP contracted 1.1% in the first quarter of 2020, resulting a year-on-year contraction of 1.4% compared to positive growth of 1.2$ in the first quarter of 2019. Mexico’s monthly economic activity index in March sank 2.3% after a 0.6% drop in the prior month.
  • Like Switzerland noted above, New Zealand’s trade surplus in April surpassed expectations for a bad reason, namely a 22% plunge in imports.
  • Singapore’s current account surplus in the first quarter of SGD 15.5 billion was the smallest in four years.

There were also reminders that with sharp recession, more disinflation than desired is also happening.

  • Corporate service prices in Japan fell 0.8% in April, reducing their 12-month increase to 1.0% from 1.6% in the prior month and 2.1% in February.
  • Finnish PPI deflation of 7.0% in April was the most negative in 126 months.
  • Singapore consumer prices fell 0.9% in April, most since 2013 and resulting in a 45-month low on-year pace of -0.7%.

Many U.S. economic indicators get released this morning: the Case-Shiller and FHFA house price indices, the Dallas Fed manufacturing index, new home sales, consumer confidence and the Chicago Fed National Activity index. Poor results relative to analyst expectations yet could put a damper on investor optimism.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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