Pandemic evolution draws financial markets’ attention

The EUR/USD parity was at the top of the 1.1160–1.1420 consolidation range at the start of the week. In recent days, with no major publications coming out at the moment, all eyes have been on the evolution of the pandemic. The spread of the coronavirus remains a source of concern in the United States and Brazil. At the same time, some countries such as Australia and Spain have once again implemented local confinement measures where new disease clusters have appeared. More than 230,000 new cases of COVID-19 have been reported. Most cases are in the Americas, but infection clusters have also appeared in the Middle East and the Balkans. Nearly 19,000 new patients are European, and Mexico now has more victims of the disease than Italy. In this context, it is not surprising to see sustained demand for safe havens. The Swiss National Bank recorded a further increase in its demand deposits for the fourth consecutive week. Admittedly, the amount of 1.6 billion is not nearly as extreme as the figures seen at the height of the crisis in March and April. Still, the cumulative figure over the period (9.2 billion) shows that the institution is not lowering its guard even if the franc seems to be moving away from its recent low of 1.0500. Another safe haven has performed particularly well in recent days. Gold broke through the $1,800/oz mark to reach $1,818.02 last Wednesday. It is the highest price for the precious metal since the end of 2011.

Swiss employment figures have been better than expected, but the gross number does not tell the whole picture. The unemployment rate in Switzerland for June fell slightly from 3.4% to 3.2%. However, in the same month, registrations in the Regional Placement Offices [unemployment centres] jumped 54.6% compared to the same period last year, and  21% of the Swiss active population is employed in part-time jobs known as “RHT” [reduced work hours]. The coronavirus pandemic has made a permanent fixture of the mechanism of negative rates, according to the chairman of the Swiss National Bank. To respond to the economic challenges, the SNB has relied on two instruments: negative rates and interventions in the foreign exchange market, explained Mr Jordan during a conference. These two measures are still aimed at slowing the appreciation of the franc, and Mr Jordan reiterated once again that the option of lowering rates into even more negative territory was still on the table.

The UK economy has suffered much from the pandemic. Between March and May, GDP plunged by 19.1% compared to the previous three months from December to February. According to forecasts from the Office for Budget Responsibility, the country is set to record the worst recession in three hundred years with an annual contraction in GDP of more than 10%. And, in addition to the shock of the coronavirus, there is still the threat of a no-deal Brexit.

Singapore announced a decline in its Gross Domestic Product in the last quarter by 41.2%, a new historic record. Analysts had expected a much less marked decline of 35.9%. On an annual basis, the drop is 12.6%. The Government, which forecast a contraction for this year of around 4%–7%, has not provided new estimates after publishing this shocking this figure.

The Fitch rating agency maintained its BBB- rating with a stable outlook for Italy.

This weekend, the markets will be looking at the European Union with the ECB meeting tomorrow and an extraordinary European summit on July 17-18 where Union leaders will meet in person in Brussels to discuss the €750-billion recovery package to deal with the COVID-19 crisis. The hope that the leaders will reach an agreement has pushed up the price of the single currency in recent days. Angela Merkel said that Germany was ready for certain compromises while Dutch Prime Minister Mark Rutte still doubts that an agreement will be reached in the short term. A new impasse in the negotiations could bring in a little volatility in the market this weekend and exert pressure on the single currency.