Eventful week

A lot has happened since last Wednesday: the Fed meeting against the backdrop of the still-worrying progression of the pandemic – particularly in the United States – and the high volatility for the EUR/USD and gold. The US Federal Reserve has left its key rates unchanged at a range of 0% to 0.25%. The central bank will stick to its accommodative monetary policy until the economy recovers from the crisis, and has said some loan programmes that were due to end in September will be extended until the end of the year. Regarding economic figures, the spring lockdown pushed the US economy into a recession. The United States recorded a historic drop in gross domestic product in the second quarter, plugging 32.9% on an annualised basis. The fall is nevertheless less severe than the -35% that was expected by analysts and the -37% expected by the IMF. As this is the second consecutive quarter in which the GDP has declined, the world’s largest economy has officially entered into recession. It had already dropped by 5% in the first quarter, affected by the start of the lockdown. Unemployment claims also rose for the second week in a row, reaching 1.434 million, and consumer spending is in a free fall, tumbling 34.6% in the second quarter. Having described economic prospects as very uncertain, the Fed could only reiterate its promise to do whatever it takes to support economic activity. In doing so, it has fuelled expectations of new announcements at the next FOMC meeting on September 16.

The situation is hardly better in Europe, where the eurozone’s GDP contracted by 12.1% in the second quarter, with Germany and France falling by 10.1% and 13.8%, respectively, and Italy and Spain falling by 12.4% and 18.5%, respectively. It is a historic fall for the EU and for Germany: the largest economy in Europe has plunged into its worst recession since the war. The euro, which in July had its best month since 2010, rose above $1.1900 on Friday but was stopped in its tracks after the publication of GDP figures, after which a wave of profit taking brought it down to 1.1696 on Monday morning. It has stabilised at $1.1750 since then.

Despite these data, S&P confirmed its AA rating for the EU and revised the outlook from stable to positive thanks to the future establishment of the €750-billion fund to support the economy. In contrast, the continued deterioration of public finances in the United States has worried the rating agency Fitch. The absence of a credible fiscal consolidation plan has lowered the country’s outlook from stable to negative. While Fitch and Moody’s both assign an AAA rating to the United States, S&P had downgraded its rating to AA+ in 2011.

In Switzerland, the SNB has been very active in the foreign exchange market. According to the latest published figures, the value of its foreign currency positions increased in the second quarter by CHF 81.7 billion. The greenback, which touched CHF 0.9056 last Friday – a 5-year low, with the franc abandoning its floor rate – has been the most requested currency.

The pound sterling also rose against the greenback, taking advantage of the latter’s weakness. The UK trade representative said trade talks with the EU remained at an impasse as Prime Minister Boris Johnson announced the two sides were not that far apart. In the latest major divergence, the British are demanding to reduce the UK’s exit bill, which conservative parliamentarians consider to be exorbitant. The request was immediately rejected by Brussels.

Gold broke a new all-time high this morning, trading at $2,036.00/oz. The weakness of the greenback, ever lower yields on US Treasury instruments, and the prospect of further easing by the Fed as of next month are pushing investors towards precious metals. Silver is also progressing and stands above $26.00/oz, the highest since the second quarter of 2013.