Attention drawn on the FED

Jun 10, 2020
  • EUR/USD 1.1355
  • DOW JONES 27’272.30
  • USD/CHF 0.9490
  • SMI 10‘184.82
  • EUR/CHF 1.0780
  • CRUDE OIL 38.25
  • USD/RUB 68.45
  • XAU/USD 1’718.00
The European Central Bank boosted the markets last Thursday as it announced it was expandi...

The European Central Bank boosted the markets last Thursday as it announced it was expanding in its emergency programme. Specifically, the €750-billion-euro Pandemic Emergency Purchase Programme (PEEP) will be increased by €600 billion and will continue at least to the end of June 2021, against the end of 2020 as initially planned. But a second event came to shake up the financial markets even more. In the US, the publication of employment figures on Friday completely took the markets by surprise. The unemployment rate in the United States actually fell in May to 13.3% despite the COVID-19 pandemic and all the restrictive measures taken to try to stop its spread. Analysts were expecting a rate up to 19% since 43 million Americans applied for unemployment benefits in two-and-a-half months. But with shops and restaurants beginning to open in some states in May, the world’s largest economy has started to recover. Some 2.5 million jobs were created, even as it was expected 7.5 million jobs would be lost.

Hopes that economic activity will bounce back after the coronavirus crisis have boosted investor enthusiasm. The NASDAQ even broke its record yesterday during the session and the European stock markets closed last week with unprecedented increases. The few unfavourable economic news failed to curb the rise in the stock market indices.  This is even though the ECB now expects an 8.7% contraction in the euro area GDP this year before a 5.2% rebound next year, and after retail sales plummeted in April with lockdown measures in effect. Retail sales fell by 11.7% compared to March and by 19.6% compared to April 2019.

After the ECB, the eyes are now on the Fed. The US Central Bank started a two-day meeting yesterday which will conclude with the traditional press conference this evening. It is the first once since the easing of the lockdown in the United States. The institution should once again stress the risks of the pandemic for the economy and comment on the surprise drop in unemployment. It has already announced that it will expand access to its SME loan programme. The minimum amount has been lowered to $250,000 from $500,000 previously. In the first version, this minimum amount was $1 million. The term is increasing from four to five years and a period of two years before the payments begin is expected. Unlike government loans, which become a subsidy for companies that mostly use them to pay wages, Fed loans will have to be repaid.

These latest events are restoring confidence in investors who are leaving the Swiss franc, a traditional safe haven. Much to the relief of the Swiss National Bank, the single currency reached its highest level of the year at 1.0915 before profit taking brought the price below 1.0800. And after twenty consecutive weeks of increases, reserves remained unchanged last week. On the economic front, the COVID-19 crisis and the lockdown measures taken to stem the pandemic severely limited activity in March, leading to a drop in GDP in the first quarter of 2.6% against an increase of 0.3% in the previous quarter.

As for oil, the price of the barrel continues to grow. OPEC+ has decided to extend the drop in production by one month. Other countries including Nigeria and Iraq have also pledged to reduce their crude oil production. This is 9.6 million barrels per day which will not be produced until July. In addition, the organisation has adopted a stricter approach to ensure that its members keep their commitments. After having moved below $20 at the end of April, the WTI barrel briefly passed the $40 mark on Monday morning in the Asian market.