How quickly is Europe’s economy rebounding?
Investors will get a reading on the progress of Europe’s economic recovery with Friday’s purchasing managers' indices from analytics group IHS Markit.
Last month’s figures showed a substantial rebound for the eurozone but were nevertheless below the 50 threshold that separates contraction from expansion. Most economists expect the July numbers to rise above that line, but caution that the pace of progress is likely to be slow.
“With all of the major euro area economies now out of lockdown, the direct marginal gain on economic activity from easing social distancing measures is much smaller,” said Peter Schaffrik of RBC Capital Markets. “Furthermore, in Germany, the stringency of social distancing measures is now comparable to that in Sweden, which implies that the relaxation of restrictions has likely plateaued this month.”
Christine Lagarde, the European Central Bank chief, warned last week that the region’s nascent recovery faced several threats, as the bank left interest rates on hold. Ms Lagarde said “exceptionally elevated uncertainty” continued to hold back business and consumer spending.
In the UK, the dominant services sector is expected to follow manufacturing and construction back into expansion in July.
Some analysts, however, have cautioned against reading too much into recent PMI data, given that they have shown continuing contraction at a time when economies are reopening.
“Beware that uncertainty and Covid noise trump surveys’ read-across for actual activity,” said economists at Bank of America. Tommy Stubbington
Will China’s currency strengthen further?
China’s economic rebound from Covid-19 has boosted the likelihood of further gains in the renminbi, which in early July reached its highest level in four months against the US dollar.
China exceeded analysts’ expectations last week to register 3.2 per cent growth in gross domestic product in the second quarter, though falling retail sales appeared to spook stock market investors. Still, the overall growth figures put the country on course to outpace other big economies this year, says Mike Kerley, a portfolio manager at Janus Henderson Investors.
That should benefit the renminbi, which broke through the widely-tracked level of seven to the dollar earlier this month and has largely held its ground. The pace and degree of China’s recovery is an indication that these gains could be extended, said Bipan Rai, North America FX strategy chief at CIBC.
On Monday, the People’s Bank of China will decide its benchmark rate, which is likely to remain at 3.85 per cent, according to Iris Pang, chief economist for greater China at ING. “The recovery of the economy in June . . . should keep the PBoC’s monetary policy stance in a comfort zone,” Ms Pang said.
The currency could be helped by investors and analysts turning negative on the dollar’s prospects ahead of November’s presidential elections in the US. Analysts expect disputes between the Washington and Beijing to escalate in the run-up to the vote, following increasingly hostile measures taken by both sides in recent weeks.
“China’s domestic fundamentals look increasingly solid,” said Zach Pandl, a strategist at Goldman Sachs. “As a result, we think the renminbi will participate in broad dollar weakness.” Eva Szalay
Will silver continue to outshine gold?
Silver has staged a strong recovery from its March lows, rising almost 60 per cent. Its price gain has even outshone gold, which is up about 23 per cent over the same period.
Investors are now wondering if the metal’s price can beat its September 2019 intraday high of $19.70 an ounce. It was trading at around $19.30 on Friday. Even if it does so, it still has a long way to go to reach its record high of close to $50, set during a supply bottleneck in 2011.
Like gold, silver has been boosted by strong investment demand as yields on safe assets such as government bonds have plunged owing to huge asset-purchase programmes by central banks during the Covid-19 crisis. This has made its big disadvantage as a financial asset — the fact that it provides no income — increasingly irrelevant.
According to Standard Chartered, silver-backed exchange traded funds have bought the equivalent of 1,209 tonnes of the metal already in July, taking year-to-date inflows to 6,663 tonnes. That surpasses the 2007 record of 5,929 tonnes.
Ole Hansen, head of commodity strategy at Saxo Bank, said the foundations for a “move higher” are there, as the US dollar is under pressure, real yields are moving deeper into negative territory and industrial production data is improving.
Unlike gold, silver has a wide range of industrial uses, including clean-energy technologies that are set to enjoy growing demand from makers of electric cars and solar panels.
Mr Hansen thinks this is one reason why the gold/silver ratio, which has dropped to a five-month low of 93.7, has further to fall. Neil Hume
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