Stock Markets
Global stocks finished higher on optimism over the reopening of the economies and some positive news about progress on vaccine trials. Later in the week some caution returned that raised geopolitical tensions, as China planned to impose a new security law on Hong Kong and as a U.S. Senate bill was introduced that could force Chinese firms to delist from U.S. exchanges. Analysts think investors can be confident in a longer-term recovery but should position portfolios and expectations to weather periods of volatility along the way.
U.S. Economy
Optimism about a possible new round of monetary and fiscal stimulus also seemed to support sentiment. On Sunday night, Federal Reserve Chair Jerome Powell stated that the central bank had other tools available to counteract the slowdown, telling an interviewer that “there is really no limit to what we can do.” On Thursday, Treasury Secretary Steven Mnuchin told reporters that the White House preferred to wait to see how the economy was responding to existing fiscal stimulus measures, although he acknowledged that there was a “strong likelihood” that more support would be needed.
The week’s economic data confirmed the view that the labor market had yet to turn the corner. Thursday’s jobless claims report showed that an additional 2.4 million Americans had filed for benefits in the previous week, bringing the trailing nine-week total to nearly 39 million. T. Rowe Price Chief U.S. Economist Alan Levenson believes it is possible that millions of displaced workers will be rehired in the summer months as the economy reopens, although he cautions that many other expected temporary layoffs could turn into permanent job losses. Most restaurants are likely to reopen at 50% capacity, for example, and numerous retail jobs may never return due to the accelerated shift to online purchases.
Metals and Mining
The gold price faced numerous challenges this session, leaving the yellow metal on track for its first week of losses since early April. Positive economic data and industrial activity from countries emerging from shutdowns weighed on gold’s movement late in the period. The currency metal reached its highest point since October 2012 on Monday, then was locked just below US$1,750 per ounce until Thursday, when it fell to its session low at US$1,719.30.
The other precious metals faced similar challenges, except for palladium which marked its first week of gains since the end of March. Countering the risk appetite country restarts had raised was mounting trade tensions between the US and China benefiting gold as investors sought safety. Volatility also impacted the silver price this week pushing the white metal below US$16.80 per ounce before a rebound brought it back above US$17. Despite much of the attention focusing on its yellow sister metal, silver is expected to outperform gold in the long term, according to Brien Lundin editor of Gold Newsletter. Platinum prices also fluctuated greatly this session, starting the week at US$813 per ounce, climbing as high as US$866 and then falling off to US$809. A Metals Focus platinum group metals (PGMs) report released on Wednesday, noted that platinum’s performance in 2020 will be positively correlated to gold. Palladium surged 5 percent this week moving as high as US$2,069 per ounce for the first time since April 7. The gains were short-lived when the autocatalyst metal subsequently slid as low as US$1,817 a 12 percent decrease. The metal was also a topic during the Metals Focus PGMs webinar which followed the outlook release. The metals consultancy firm sees the metal recovering during the second half of 2020, driven by tight supply and renewed demand.
A re-emergence from lockdowns may have dragged on the precious metals this week, however it bolstered the base metals sector with the majority of the sector — except zinc — ending the week in the green. The copper price ticked 2 percent higher this week despite reports that LME stocks of the red metal in Rotterdam are swelling. According to data from Fastmarkets, stores of copper now total 84,925 tonnes, with 73,700 tonnes now on-warrant. That figure is almost 10 tonnes higher than the beginning of the month, indicating European consumption is still down. After starting the year above US$2,000 per tonne, zinc has faced increasing pressure from weak demand due to current trends. While the metal briefly moved as high as US$2,021 this week its ascent was upended late in the period when it fell back below US$2,000. Things may get worse as seasonal demand in China — which is propping up prices currently— is anticipated to drop in June and July. Nickel performed well during the second last week of May, edging higher after starting the session at US$11,950 per tonne. By week’s end the metal had grew by 6.7 percent. Primary nickel consumption is comprised of the stainless-steel sector, however growing demand from the electric vehicle sector could be a problem for producers down the road. Lead ended the week 4.8 percent higher from its Monday value of US$1,578.50 per tonne. Current demand for lead has been another casualty of supply chain interruptions and country lockdowns, but the metal is expected to perform better in the medium term.
Energy and Oil
The long rally for oil prices came to a halt on Friday over fears about a slower-than-expected economic recovery in China. The Chinese government broke with tradition and declined to set a growth target for 2020 due to “great uncertainty.” Markets were also disappointed with the tepid size of government stimulus from Beijing. Meanwhile, rising U.S.-China tension adds to the concerns. Despite questions about economic growth, China’s oil imports are set to rise by about 2 percent this year. In fact, China’s oil demand is already back to about 90 percent of pre-pandemic levels. Some poorer oil-producing countries that previously made oil prepayment deals – deals that consist of a payment of cash to the country, repaid by oil exports – are under serious pressure as they need to deliver more oil to satisfy the terms of the deal. For instance, Kurdistan is struggling to repay a $500 million prepayment deal with Glencore. A new study from the Dallas Federal Reserve found that the slide in oil prices has been negative for the U.S. economy, outweighing the benefits to the consumer from lower gasoline prices. The decline results in lower fixed investment from the oil industry, and it also may put stress on the banking system. Natural gas spot prices rose at most locations this week. The Henry Hub spot price rose from $1.56 per million British thermal units (MMBtu) last week to $1.83/MMBtu this week. At the New York Mercantile Exchange (Nymex), the price of the June 2020 contract increased 16¢, from $1.616/MMBtu last week to $1.771/MMBtu to this week. The price of the 12-month strip averaging June 2020 through May 2021 futures contracts climbed 4¢/MMBtu to $2.399/MMBtu.
World Markets
Equities ended the week higher on hopes of an economic recovery as countries began to emerge from lockdowns, but renewed U.S.-China tensions curbed the gains. The pan-European STOXX Europe 600 Index rose 3.63%. Among major European country stock indexes, Germany’s Xetra DAX Index climbed 6.10%, France’s CAC 40 gained 4.34%, and Italy’s FTSE MIB Index added 2.79%. The UK’s FTSE 100 Index advanced 3.45%.
Germany and France proposed a EUR 500 billion European Union (EU) recovery fund, giving impetus to a coordinated European fiscal response to current economics. The proposal would be linked to the EU’s next seven-year budget cycle from 2021–2027, and the funds would not be available until then. The European Commission would raise the money in the capital markets and use it to support EU spending rather than loans to national governments. However, Austria, the Netherlands, Denmark, and Sweden oppose the plan, saying they would only accept a rescue fund that gave out loans.
The week brought no key data releases but plenty of political issues for markets to digest. There was a further deterioration in U.S.-China relations as the White House stepped up pressure on China, while Beijing announced plans to impose national security legislation on Hong Kong. Asian markets weakened on Friday, with Hong Kong’s Hang Seng Index plunging 5.6% to close 3.6% lower week on week. Mainland A-shares also fell on Friday, with the large-cap CSI 300 Index down 2.2% from the previous week.
The Week Ahead
U.S. financial markets will be closed May 25 in observance of Memorial Day. Important economic data being released include new home sales on Monday, durable goods orders on Thursday, and consumer sentiment on Friday.
Key Topics to Watch
- Chicago Fed national activity index
- Case-Shiller home price index (year-over-year)
- FHFA home price index
- Consumer confidence index
- New home sales
- Beige book
- Initial jobless claims
- GDP second estimate (annual rate)
- Durable goods orders April
- Core capital goods orders
- 8Advance trade in goods
- Personal income
- Consumer spending
- Core inflation
- Chicago PMI
- Consumer sentiment index (final)
Markets Index Wrap Up
