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What tools can the Fed use to support the recovery?

Investors will this week be looking to the US Federal Reserve for clues at its monetary policy meeting about what path the central bank will take to shore up an economic recovery that appears to be weakening.

Outbreaks of Covid-19 across the US seem to have impeded a rebound in the labour market, while a swift rally in the S&P 500 is showing signs of losing momentum. The largest weekly rise for the large-cap index is 1.8 per cent over the past month.

The Fed has already slashed interest rates to zero, pledged to buy an unlimited quantity of government debt and unveiled a series of emergency measures that include facilities to support the markets for corporate debt and municipal bonds. 

Stocks on Wall Street have climbed more than 45 per since March as a result, but concerns remain about the sustainability of the recovery, prompting speculation as to what other tools are at the Fed’s disposal. 

Negative interest rates have been ruled out for now but other unconventional measures are on the table.

The first is explicit forward guidance about the path of interest rates, under which moves are tethered to inflation outcomes or unemployment levels. Fed officials discussed this option at length at their previous meeting, leading some to believe this will be the next policy to be rolled out. 

Yield curve control, in which the Fed sets targets for Treasury yields and then buys and sells as many securities as necessary to maintain those levels, has been debated too. But officials have been less keen to embrace this policy, indicating that additional research needs to be done. Colby Smith

How much higher can the oil price go?

Brent crude is back to near $45 a barrel, after collapsing below $20 in April as lockdowns began to bite. But despite this impressive recovery, at least in percentage terms, oil companies are still getting roughly $20 less per barrel for their crude than they were this time last year, in what has been one of the most painful periods for the industry of the past 20 years.

The question every oil executive is asking, therefore, is whether the recovery can keep going. No one seems particularly confident. Opec and Russia, which cut production sharply to trigger a rebound in price, will start to add back some of their output from August 1.

Against this backdrop, there has been a renewed threat to crude demand. China, the second-largest oil consumer after the US, is expected to moderate its buying spree after snapping up millions of cheap barrels over the past few months, while US states are having to reimpose lockdown measures as the country struggles to get the pandemic under control.

The fundamentals do not look promising. The market may now be in a small deficit, but the huge oil surplus built up during March and April, when global demand was down about 20 per cent or 20m barrels a day, will take a long time to burn off. Traders remain cautious, with Brent trading within a narrow $5 range for most of the past month on low volumes.

After the turmoil of the spring, it may take until after the summer for a stronger direction to emerge. David Sheppard

How much life is left in the euro rally?

The euro surged to trade at a 22-month high against the dollar last week, hitting $1.16 on Friday, and analysts expect more gains to come.

“How far can it go? We think $1.20,” said George Saravelos, global head of currency research at Deutsche Bank.

Two catalysts have boosted the single currency: an agreement among Europe’s leaders on a historic €750bn recovery fund, and signs that the region’s economies are more resilient to the pandemic than the US. 

“Our economists expect a steeper and smoother rebound from the corona-crisis in Europe than the US due to better virus control and a much smaller increase in unemployment rates,” said analysts at Goldman Sachs.

Data released this week will reveal whether this new-found optimism is justified.

Investors will be keeping a particularly close eye on second-quarter eurozone growth data on Thursday, which will provide a reading on whether the cautious reopening of countries has led to a rebound. Inflation and retail sales data will provide further clues about the likely direction of the currency.

Gaétan Peroux, a strategist at UBS chief investment office, said global demand for EU exports would also have to rebound for the euro to hit $1.20, which he expects to happen in the first half of next year. Eva Szalay


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