Third Week of June Starts with Virus-Driven Risk Aversion

June 15, 2020

The attempted reopening of business activity is happening with a critically missing element, and that is the public’s confidence that doing so is safe from a health standpoint. This is particularly true in the United States where many politicians and the medical experts are saying different things and after a four-year propaganda war to destroy any semblance of reason-based truth. Globally identified cases of Covid-19 now surpass 8 million cases, 27% of which have been in the United States where a number of states are now experiencing a rise in the growth of new cases. There is also fear that continuing street protests and the surprising number of people disregarding advice to wear a facial mask in public will fan a second big wave of the disease sooner than had been predicted earlier.

After a brief reprieve in market pessimism last Friday, the selling of risky market assets picked up again today. Share prices closed down 3.5% in Japan, 4.8% in South Korea, 3.1% in Malaysia, 2.2% inĀ  Australia and Hong Kong, and 2.6% in Singapore.

Chinese equities lost 1.0%. In May, Chinese industrial production, retail sales, fixed asset investment, unemployment, and house price inflation were softer than anticipated.

  • Industrial production, which in December had recorded on-year growth of 6.9%, rose just 4.4% on year in May and posted a 2.8% average decrease in January-May from a year earlier.
  • The year-to-date drop in Chinese retail sales was 14.0% during the first five months of 2020 compared to a rise of 8.0% in full-2019, and sales in just May remained 2.8% lower than a year earlier.
  • In January-May, fixed asset business investment posted a 6.3% on-year decline compared to a 5.4% rise in full-2019.
  • Unemployment dipped only 0.1 percentage point to 5.9% in May and has averaged 6.0% over the last four months.
  • House price inflation fell 0.9 percentage points in May to a two-year low of 4.2%.
  • All these data discredit the presumption that having managed to contain its Covid-19 outbreak quickly, China will experience a V-shaped business cycle. Even more worrisome, there are signs that the virus is resurfacing in China.

Equity markets in Europe are down over 1.0% in Germany, France, the U.K., and Spain, and Italy’s slide is near to 1%. U.S. futures point to a large drop too.

10-year sovereign debt yields have fallen as investors prioritize safety of return. Yields are down four basis points in U.S. Treasures, 2 bps in British gilts and Germany bunds, and a basis point in the case of Japanese government bonds.

The price of West Texas Intermediate crude oil fell 2.3% , and gold is down 1.3%.

The dollar is up over 1% against the peso, 0.9% versus the Swiss franc, and 0.7% relative to the Australian dollar. The greenback appreciated 0.4% vis-a-vis the loonie, 0.2% relative to the yuan and kiwi and 0.1% against sterling. The euro has moved in lockstep with the dollar, while the yen, which like the dollar tends to benefit from risk aversion, has outperformed the U.S. currency by 0.1%.

China is not the only economy to report weak data today.

Japan’s monthly tertiary index of service sector activity fell 6.0% on month in April compared to a 1.0% slide in the first quarter and an average rise in 2019 of 0.3%, and the April reading was 11.5% below its level in April 2019.

Euroland’s seasonally adjusted trade surplus imploded to EUR 1.2 billion in April from a monthly average in the first quarter of EUR 23.2 billion. Exports collapsed 24.6% on month and 29.3% on year.

Greek construction output was 44.1% lower in the first quarter than in the final quarter of last year and posted a year-on-year drop of 10.3%.

The Netherlands’ trade surplus in April of EUR 3.511 billion was at a 15-month low, as both exports and imports suffered on-year declines of around 20%.

Singapore’s jobless rate in the first quarter rose to a 42-quarter high.

The New Zealand service-sector purchasing managers index rebounded from a record low 25.7 reading in April to a 2-month high of 37.2 last month, which signals continuing rapid deterioration.

Anemic demand conditions continue to depress inflation. Italian consumer prices in May fell 0.2% both from April and from a year earlier, which was the first 12-month decline since the final quarter of 2016. Wholesale price inflation in India of -3.21% in May was the most negative in 4-1/2 years. Switzerland’s combined PPI/import price index moved more deeply below zero percent to -4.5%, its most negative extent in 50 months. Domestic producer prices were 2.4% lower, while import prices dropped 8.6% over the past year. Polish CPI inflation of 2.9% was at a 6-month low. Danish producer prices fell more sharply in May (5.6% from a year before) than such had in April, and Finnish consumer prices in May were down 0.2% compared to a year earlier.

The monthly Empire State manufacturing index recovered much more sharply than forecast to a June reading of -0.2 from an average reading in the prior three months of -49.4 but was still softer than February’s score of +12.9. Moreover, investors are bracing for Fed Chairman Powell’s semi-annual testimony about the economy before the Senate Financial Services Committee tomorrow and before the House Banking Committee on Wednesday. P0well’s sobering remarks at the post-FOMC press conference last Wednesday kicked off a big drop in U.S. and global share prices.

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

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