Will a flurry of European bond sales disturb the summer lull?

August is typically a quiet month for government bond sales in Europe as nations take a summer break in their issuance calendars — but not this year. Scarred by the coronavirus pandemic, Germany, France and Spain will sell up to €22bn of bonds over the next two weeks, according to strategists at UniCredit, with Italy potentially adding to that with an auction of its own.

That is a similar pace of sales to the second half of July, but at a time when investors are receiving no cash flows from maturing bonds due to the relative lack of sales in past years.

“A lot of countries have a mid-August slot in their calendar for auctions, which they typically don’t use, but these are exceptional circumstances,” said ING strategist Antoine Bouvet.

The extra supply hitting the market could halt the recent rally in European bond prices that last week pushed Italian yields to their lowest since March and Germany’s to their lowest since early May.

However, fears over a potential resurgence of coronavirus and renewed measures to limit its spread are likely to suppress yields for now by driving investors into relatively safe assets such as the government debt on sale this month, according to Mr Bouvet. 

“The market is focused on the trajectory of the pandemic, and the news flow isn’t particularly encouraging,” he said. “It’s pretty hard to see fixed income markets repricing as long as that’s the case.” Tommy Stubbington

How strong is the US consumer?

Investors seeking greater insight into the health of the US consumer will receive two important data points on Friday: the retail sales report for July and, just a few hours later, the preliminary figures for the University of Michigan’s index of consumer sentiment for August.

Economic activity had begun to stabilise at the start of summer as US states and cities started to slowly emerge from coronavirus lockdowns. But the emergence of virus hotspots across the nation since has forced many local officials to reverse their reopening plans.

Policymakers have grown increasingly worried about these developments and what they mean for the economic outlook. At his most recent press conference after the monetary policy meeting in late July, Federal Reserve chairman Jay Powell explicitly tied the economy’s trajectory to that of the virus, underscoring the importance of containing its spread.

“The path of the economy is going to depend to a very high extent on the course of the virus and on the measures that we take to keep it in check,” he said. “That is just a very fundamental fact about our economy right now. The two things are not in conflict.”

Disappointing figures on Friday — which appear likely in light of the virus’s resurgence — are likely to heap additional pressure on the Fed to act soon, turning investors’ focus to the upcoming meeting in mid-September. Colby Smith

How close is China’s economy to a full recovery?

As the rest of the world grapples with the coronavirus pandemic, investors already captivated by soaring share prices in Shanghai and Shenzhen will receive two key readings this week about how close China’s economy is to a full recovery.

Economists surveyed by Bloomberg predict the official consumer price index, out on Monday, will show year-on-year inflation of about 2.6 per cent for July. This is in stark contrast to a jump above 5 per cent when the prices on consumer goods leapt after lockdowns were imposed across the country early this year.

But coronavirus is not the only outbreak in China. Rolling bouts of African swine fever are still killing herds and driving the price of pork higher, while speculators have bid up corn futures 20 per cent since the outbreak went nationwide in February. High prices for both key commodities could help push the inflation gauge above expectations.

Retail sales figures, out on Friday, are expected to paint a mixed picture. The consensus forecast is for a rise of 0.2 per cent in July — ending a six-month run of contraction. However, economists at Bank of America have pencilled in a year-on-year drop of 0.5 per cent, warning that “severe floods in central and southern China might have suppressed local consumption”.

Together with the threat of further disruption to trade from the US during election season, a big miss for retail sales could give policymakers in Beijing reason to reconsider their reluctance to deploy more serious stimulus measures during the pandemic fallout. Hudson Lockett

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