The European clash over how to deal with the economic impact of the COVID-19 crisis has raised fears for the future of the block, but the German-French proposal to help the most affected states is key. However, the markets want details! All eyes will be on the European Commission, which on Wednesday will present its recovery plan after the pandemic.
The challenge is to ensure that weaker states like Italy have access to financing without increasing their debt burden. But EU states are still divided over whether to channel funds for recovery through loans or transfers. If those confronting high spending manage to weaken the plan, the euro and southern European bonds risk falling in yield.
The change in Germany's previously tough position was key. It is now the turn of others, such as Austria and the Netherlands, to decide whether they are ready to cross the Rubicon.
China is again the epicenter of geopolitical tensions. Not only does the US, represented by its President Donald Trump, call on Beijing to take responsibility for the coronavirus outbreak around the world, but the riots in Hong Kong have also resumed.
Last week, Celestial Empire's government released a plan that calls for a tougher stance against protesters in Hong Kong. A package of laws aimed at suppressing the opposition has been submitted to the House of People's Representatives. Although the details are not yet known. But one thing is clear, the initiative is a serious blow to civil liberties and the autonomy of the city.
Beijing's attempt to subdue the opposition in Hong Kong may be used by the U.S., reviewing the city's special trade status. At the moment, the U.S. "threatens" to exclude Chinese companies from the U.S. trading floors, prohibit them from listing on stock exchanges, restrict investment (Trump has already banned U.S. pension funds to invest in China). Also, the U.S. warned about the possibility of revision of old trade tariffs and the introduction of new tariffs and/or "economic penalties.
However, it is unlikely that any of the parties to the conflict will go too far. The countries have exchanged threats and that's all for now. The risks are too high to start a renewed trade war. Markets are not over yet, the pandemic is not over, there is no vaccine. Yes, many countries are beginning to gradually emerge from quarantine, weakening sanitary measures. But it's more of an insurance policy against the final bankruptcy of small and medium-sized businesses. Many entrepreneurs already had to shut down their businesses. Those few who still keep afloat need to get back to work so as not to "bend over".
According to economic data, the week is not very generous for releases. We can highlight the consumer confidence, the GDP review for the first quarter and data on income and expenditure of individuals in the U.S.. In Europe, the business climate index in Germany and the consumer inflation indicator will be interesting. The head of the Federal Reserve Jerome Powell will speak at the end of the week.
The Japanese yen, which often acts as an asset shelter in case of geopolitical risks, may be under attack. The chain of controversial and erroneous actions by Japanese Prime Minister Shinzo Abe undermines his support. It has been reduced to a level that could threaten the early termination of his authority, even as he prepares to cancel the Tokyo and regional emergency.
Abe had to abandon a cash payment plan of 300,000 yen ($2,786) for affected households and replace it with a cash payment of 100,000 yen for each Japanese citizen. But the new program has been criticized for technical and other difficulties in applying for this assistance.
Also, the expensive programme of sending protective masks to each household was marred by complaints about mold, insects and stains. Not the best help in the pandemic.
But the main hype surrounding the current Prime Minister came after an attempt to retain the Tokyo Chief Prosecutor after reaching retirement age and adopt a bill to extend the retirement age. According to critics, this action could undermine the independence of the judiciary.
Tokyo chief prosecutor Hiromo Kurokawa himself resigned last Thursday after admitting that he played mahjong with money during a state of emergency when citizens were asked to stay home.
Japan's economy is already on its way to the deepest recession in post-war history, which could make it difficult for Abe to recover. Possible successors to the post of prime minister of Japan have even been announced. This is former Foreign Minister Fumio Kishida, former Defense Minister Shigeru Ishiba, who is also a chief critic of the current prime minister.
However, to replace Shinzo Abe, the former lacks support in the party, the latter lacks popular support. It's a very interesting political situation.
A difficult time may come for the Japanese yen, even though the current government plans to lift the state of emergency, which is good for business and the economy.
In the oil market, as it has already taken root recently, not everything is clear. Market participants are trying to glorify positive facts for the oil price. Drilling activity in the U.S. has been visibly declining for a week now. Oil companies are reducing their investments in business, and the reserves of raw materials in Cushing (where contract deliveries are coming from) also showed a decline.
OPEC countries, led by Saudi Arabia, as well as their OPEC+ allies, together with Russia, also started cutting production in May. While details and quantitative data are not yet available, the progress of efforts to support prices by the oil cartel and its partners will only be known in early June.
The support of black gold prices can also be seen in the resumption of economic activity in most countries of the world, which may indicate the prospects for increased demand. Not as fast as the bulls would like it to be, but this is something.
A small shock to the oil market was China's refusal to target its GDP growth. Beijing said it will focus this year on GDP growth and structural changes in the country. The consequences of the pandemic, as many forecasters expect, will "eat" 5-8% of the average demand for raw materials in China. And this is one of the largest consumers of black gold in the world.
An additional weighty factor of optimism is the monetary policy in the world's leading economies. Central banks are generously pouring funds into the markets, filling them with cheap liquidity. Obviously, the nearest plans of any Central Bank is a long, ultra-soft monetary policy.
The blame, understandably, for the coronavirus pandemic, which has visibly undermined the world economy. Although there is no cure for the "disease" yet, markets are acutely reacting to news about the development of the vaccine. The boldest predictions say that by autumn there will be a working cure for the "enemy" that has shocked the world.
In addition to all these news, we can also highlight the European Commission's plans for a fund to restore the economy of the EU's troubled countries (as we mentioned earlier). There is no consensus yet, but the fact that the first EU economies (Germany and France) themselves proposed this initiative is half the story. But there is also a "double-edged stick". Debt problems of some EU countries, for example Italy, may be a potential bomb that can shake the markets.
But all of the above may negate a new round of U.S. trade wars with China. As we remember last year, mutual trade restrictions significantly reduce the demand for fuel, and as a result, for raw materials.
Therefore, preliminary, the mood in the market is more positive than negative. But it may change at any time.