Global risk rally takes a breather

News on the virus front is mixed. Europe continues to see low numbers of new cases (though there are signs that the reproduction rate is moving close to 1) but in the US the picture is more mixed as the number of new cases is moving sideways. This hides big differences between states. The three most populous states – California, Texas and Florida – are all struggling with high levels of new infections and Texas and Florida have seen a renewed increase lately. However, 25 states are seeing declining levels of new cases, leaving the country-wide level broadly flat. The situation in emerging markets is also concerning, in particular Latin America, which is driving one-third of all virus cases. Near term, it is difficult to see how it will manage with lockdowns being eased. The good news is that the growth ratPolitics in Europe are heating up with a new Brexit deadline looming on 1 July and
discussion of the EU Recovery Fund starting on Friday.e of infections is at least quite moderate, around 5% or lower in most countries. Meanwhile, medical companies are making progress on an effective vaccine, with AstraZeneca, Moderna and Johnson & Johnson all in the process of testing vaccines in human trials.

Economic releases continue to point to gradual recovery. Last Friday, US non-farm payroll numbers surprised quite significantly on the upside, with over 3m jobs being created against an expectation of a fall of 6.7m. Furthermore, small businesses' expectations in the US continued to recover in May. Next week, we get US retail sales data for May on Tuesday – after two months with big declines, we expect a strong increase although remaining below the pre-coronavirus level. We base this forecast on daily transaction card spending, which continues to improve. In Europe, we keep an eye on ZEW in Germany on Tuesday – according to ZEW, the euro economy has already moved into an upswing quadrant but we will look out for whether the rise in expectations of the past two months continues and whether the current situation assessment follows suit.

This week, the US Federal Reserve maintained its dovish stance on Wednesday. It was clear the Fed was in no hurry to scale back its support to the economy (Fed Monitor – ‘Not even thinking about thinking about raising rates', 10 June). The Fed maintained its forward guidance and signalled the target range will remain at 0.00-0.25% through to end-2022. It said it will continue to buy US Treasury securities and mortgage-backed securities ‘at least at current pace', which is significantly faster than in earlier QE programmes. The Fed also signalled that yield curve control, i.e. setting a ceiling for medium-term yields, could come into play if the recovery of the US economy goes awry. Financial markets saw the Fed meeting as a selling opportunity (as the Fed came out with a bleak growth forecasts). Next week, several Fed speakers will clarify Fed's stance. Furthermore, Bank of Japan (Tuesday) and Bank of England (BoE) (Thursday) have their meetings. We do not expect major policy changes, although the BoE may expand its QE programme by another GBP100bn.

Politics in Europe are heating up with a new Brexit deadline looming on 1 July and discussion of the EU Recovery Fund starting on Friday. On Brexit, we do not expect the UK to ask for an extension of the transition period before 1 July (see Brexit Monitor, 10 June). The next key event to watch out for is the high level summit between UK PM Boris Johnson, European Commission President Ursula von der Leyen and European Council President Charles Michel on 15 June. On the recovery fund, while the discussions start at the EU heads of state virtual meeting, we believe the real action will take place on 9 and 10 July, when leaders will try to meet in person in Brussels.

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