Stock markets positive + USA/China: Economic diplomacy

Due to positive economic data and forecasts, the stock markets continue to show friendly, interest rate and foreign exchange market are in calm waters. U.S. Treasury Secretary Yellen and Chinese Vice Premier Liu He met for the first time in virtual talks to improve the strained relationship between the two countries, and the Fed continues to emphasize the temporary nature of the rise in inflation.

The euro opens today against the USD at 1.2223, after marking the low of the last 24 trading hours at 1.2212 in the US session. The USD is setting against the JPY at 109.62. As a result, EUR-JPY is trading at 133.98. EUR-CHF is oscillating at 1.0965.

Yesterday, european indices reached a new record high in the context of a positive sentiment on the international stock markets. In the course of the day, the gains could not be held.

At the current level, it is noticeable that there is always a willingness to quickly hedge profits at the increased level. Accordingly, no euphoria is building up on the stock market, which would be harmful in the medium and long term with regard to the upward trend.

The background to the current friendly state of the stock market is largely positive economic data and economic forecasts. However, it is also the declining Corona momentum in Europe (covid crisis downgrade). Also from a geopolitical point of view, there is a delicate potential for relaxation in the relationship between the U.S. and China (start of economic diplomacy) and the U.S. and Russia (summit in Geneva).

Little is happening on the currency market. The USD meanders at established levels without strong momentum. Yesterday’s rise in precious metals against the USD was largely (as so often) countered during the day.

On the interest rate front, little continues to happen. Both ECB and Fed representatives have made their positions loud and clear in the recent past. Not only the money market is an expression of political prices, but also the capital market has only limited freedom to determine prices.

Economic diplomacy: Virtual meeting Yellen with Liu He
U.S. Treasury Secretary Yellen and Chinese Vice Premier Liu He have met for the first time in virtual talks to improve the strained relationship between the two countries.

This brings the issue of economic diplomacy to the forefront. I expressly welcome this, as it opens up scope for de-escalation for the benefit of the entire global economy.

According to the U.S. Treasury Department, Secretary Yellen discussed with Liu He the U.S. government’s plans to support a continued strong economic recovery and the importance of cooperation in areas that are in the U.S. interest.

Indeed, past U.S. consumption-based economic programs have had a globally stimulative effect in the context of a demand pull, as can be seen in the now historically high U.S. trade deficits. This will not change with the planned U.S. investment program, but rather intensify. Against this background, it makes sense for the U.S. government to seek talks with one of the largest U.S. creditors. Yes, it is in the U.S. interest to do so.

According to Xinhua, given the importance of the economic relationship, both sides have shown a willingness to maintain communication.

That is good, the beginning has been made, continuations and rapprochements must follow.

Yellen and Liu would have discussed the macroeconomic situation and bilateral and multilateral cooperation, according to Xinhua.

The two largest economies share a high degree of responsibility in this complex world, and not only for themselves. In some circumstances, both sides are now aware that peace feeds and discord consumes.

Fed Vice President: Inflation only temporary
Fed Vice Chairman Randal Quarles classifies the rise in inflation in the U.S. as temporary. He said in an interview with Politico that a high inflation number in a single month does not necessarily lead to sustained high inflation.

Indeed, that is true. Using temporary quantity divorced from the underlying quality as the ultimate metric is formally forbidden. An analogy to weather and climate suggests itself here. Weather (cold rainy May = current quantity) has no significant relevance to climate prediction.

Quarles pointed out that inflation remained below the Federal Reserve’s two percent target for a decade following similar increases in the aftermath of the 2007 to 2009 economic collapse.

This anecdotal evidence cannot be argued away. This experiential horizon of Western central banks is dominant for current behavior.

Referring to the Corona crisis, Quarles said inflationary pressures are to be expected after such an event. And one would expect that to be temporary. In doing so, he highlights the issue of base effects without explicitly naming it.

Conclusion: There will be no frantic tightening of interest rates and monetary policy on the part of the Western central banks.

Eurozone: Predominantly positive data sets
According to the final calculation, the purchasing managers’ index for the manufacturing sector determined by Markit stood at 63.1 points as of May (forecast and preliminary value 62.8). The eurozone unemployment rate fell to 8.0% as of April from 8.1% previously (forecast 8.1%). This was the lowest rate since July 2020.

Consumer prices increased by 2.0% year-on-year (forecast 1.9%) as of May according to the first estimate, up from 1.6% previously. The core rate was 0.9% (forecast 0.8%), up from 0.7%.

Italy’s GDP unexpectedly increased by 0.1% quarter-on-quarter as of the first quarter (forecast -0.4%). Year-on-year, there was a decline of 0.8% (forecast -1.4%) after -1.4% previously

USA: Predominantly positive data sets
According to the final calculation, the purchasing managers’ index for the manufacturing sector determined by Markit came in at 62.1 points as of May (preliminary value 61.5). The ISM Purchasing Managers’ Index for the manufacturing sector increased to 61.2 points as of May from 60.7 previously (forecast 60.9). Construction spending increased 0.2% month-over-month (forecast 0.5%) as of the April reporting month, down from 1.0% previously (revised from 0.2%). This was 0.5% better than expected for the two-month period. The Dallas Fed Manufacturing Business Index fell to 34.9 points as of May from 37.3 previously (nevertheless historically high level).

Australia: GDP sets positive tone
GDP increased by 1.8% quarter-on-quarter as of Q1 2021 (forecast 1.6%), up from 3.1% previously. Year-on-year, there was an increase of 1.1% (forecast 0.7%) after -1.0% previously.

DepthTrade Outlook

In summary, the scenario favors the euro against the USD. A drop below the support zone in the EUR/USD currency pair at 1.1690 – 1.1720 neutralizes the positive tendency of the EUR.

Christian Zürcher Send an email

From 1990 to 2005, Mr. Zürcher was a risk analyst in the institutional swiss banking sector - thereafter, he specialized exclusively in private trading of financial products. He is a certified real estate agent and studied economics. For more than thirty-five years, Mr. Zürcher has been intensively involved in the observation of financial markets, globalization, and the monetary system. Mr. Zürcher enjoys an excellent reputation as a political analyst and commentator related to finance.
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