Market sentiment deteriorates (Afternoon analysis 24.06.2020)

Apart from the rapid increase in the number of COVID-19 cases in the southern US states, there is also a potential trade conflict between the US and the EU. The deeper recession (according to IMF forecasts) than expected in April is also worrying. Demand for the dollar is rising, but changes have been limited so far.

The issue of international trade returns quickly

On Wednesday afternoon, market sentiment deteriorated slightly. Today, the optimism of recent weeks has been weakened by reports from the international trade front and revisions to the International Monetary Fund (IMF)'s GDP projections in relation to April's forecasts.

This time, however, it wasn't about customs fight between the US and China, but between the US and the EU. The Office of the US Trade Representative reported that the White House administration is considering imposing new duties on exports from France, Spain, Germany and the UK worth 3.1 billion USD. In response, the EU is considering maintaining the ban on US exports for the rest of the summer.

Optimistic market sentiment towards the opening of economies was supported by the actions of central banks, but the problems in international trade, which were a plague in 2019, may make this positive sentiment worse, especially as the shape of the recovery path from the recession is still very uncertain.

The more we know, the worse it looks like

Uncertainty is underlined by today's revision of the International Monetary Fund (IMF) forecasts for the world economy. The IMF estimates that the global economy will contract even more this year and that the path for a return next year will be slower than expected in April. According to the latest projections, global GDP is expected to shrink by 4.9% this year. It is expected to contract this year by 4.9% (3% in April) and grow at a pace of 5.4% in 2021. (vs 5.4% in April).

As a result, according to the IMF's estimates, the loss to the world due to the recession will amount to 12.5 trillion USD this year (against about 11 trillion USD of the announced fiscal stimulation). The combination of another potential US trade fight with the EU and a revision of the IMF projection (and in the background, the rapid increase in the number of cases in the southern US states) scared market participants a little on Wednesday.

Mainly the most risky assets were incurring losses. Market indexes recorded losses on both sides of the ocean of about 2-3% for the largest economies. We have observed the strengthening of the dollar, but - given the information, we have received and taking into account the changes from previous days - these were rather small fluctuations of the US currency. Although the EUR/USD quotations fell slightly below the 1.13 boundary in the afternoon, it was about 0.3% below yesterday's closing, and the dollar was still a long way from paring losses even from the last two trading days.

As a result, the basket of the zloty weakened in relation to the main currencies. The USD/PLN exchange rate rose to nearly 3.96 PLN and the EUR/PLN to 4.46 PLN. However, these are the levels observed in the past two weeks. This limited range of fluctuations may potentially change if it turns out that today's weakening of sentiment is permanent. A correction of optimism in recent weeks could strengthen the dollar in the global market, negatively affecting emerging currencies, including the zloty.