- Rates: Fed to start with individual corporate bond buying
Risk sentiment made an intraday U-turn in the US trading session, pulling core bonds back to opening levels. The Fed lifted spirits by extending the scope of its corporate bond buying programme. Asian markets join the risk rebound this morning, but rising COVID-19 crisis and the risk of a second hit to the economy herald cautiousness going forward. - Currencies: (hope) on additional stimulus eases USD bid
The dollar profited only modestly from the risk-off yesterday. Later, the USD decline even resumed as the Fed reinforced its commitment to support the economy as it announced to by individual corporate bonds. EUR/USD is again drifting higher in the 1.12/1.1425 range. Sterling looks better protected as the tone on the UK-EU talks turns more constructive
The Sunrise Headlines
- Wall Street gradually recovered from a 3% lower opening, boosted by the Fed’s announcement to buy individual corporate bonds. The Nasdaq (+1.43%) outperformed. Asian stocks rebound with Japan (+5%) outperforming.
- The Federal Reserve will begin buying individual corporate bonds in addition to ETFs under its Secondary Market Corporate Credit Facility. In a separate statement, the Fed also kicked off its Main Street Lending Programme.
- UK PM Johnson said the prospects for a brexit accord are “very good” after his call yesterday with EU leaders, echoing comments from the bloc’s top officials. Both sides are willing to soften their position. Formal talks resume June 29.
- The Bank of Japan left its key policy rates and asset purchases unchanged this morning. It did increase lending support to companies struggling from the virus, estimating the size of the package now at 110tn yen, up from 75tn yen.
- The US is preparing a $1 tn infrastructure proposal for roads, bridges but also 5G, people familiar said. The expiry of an existing $305 bn infrastructure funding law by Sept 30 could be used as vehicle to push through the broader package.
- Varadkar’s Fine Gael and Martin’s Fianna Fáil will form a ruling coalition for the first time in Ireland’s history, 4 months after inconclusive elections. The party leaders will rotate as PM. The Greens will join the coalition to secure a majority.
- Today’s economic calendar contains US retail sales and industrial production figures for the month May. The UK publishes its April labour report. The ZEW indicator is due in Germany. Powell appears before the Senate
Currencies: (Hope) On Additional Stimulus Eases USD Bid
Fed put weighs on the dollar
Markets started the week in outright risk of modus. Investors feared that a second wave of corona infections could complicate the recovery. However, the risk-off was mainly visible in equity markets. Gains in the dollar were modest. EUR/USD already turned north early in US dealings. Equities rebounded further and the USD decline accelerated as the Fed announced it will start buying corporate bonds under its SMCCF. The Fed put was again firmly in place. EUR/USD closed at 1.1323. USD/JPY held a rather tight sideways trading pattern as the risk rebound weighed on the yen too, counterbalancing the broader USD declined. The pair closed at 107. 33.
This morning, Asian markets join the risk rebound on WS. The BoJ left its policy rate and the target for 10-y government bond yield unchanged but expects the amount of lending under crisis program to rise to 110 trillion from 75 trillion. Sentiment was also supported by a Bloomberg article that US president Trump is preparing infrastructure package of about $1 trillion to support the recovery. The TW dollar (DXY) declines further 96.50 area. EUR/USD is holding strong in the 1.1340 area.
Today, ZEW investor confidence in Germany is expected to rebound further to 60 from 51 (expectations). In the US, May retail sales are expected to rise 8.4% M/M after a 16.4 decline in April. Constructive data might support global sentiment and weigh on the dollar. However, future path/pace of the recovery remains highly uncertain. Powell will hold its semi-annual testimony before the Senate. He will probably reiterate the Fed’s commitment to support the economy as necessary .
Last week, the three week-long EUR/USD rally fell prey to profit taking. However USD rebound stayed modest even as sentiment turned risk off. Yesterday’s EUR/USD price action should be considered as constructive. Some further drift north in the 1.12/1.1425 range might be on the cards.
EUR/GBP spiked temporarily north of 0.90 given the global risk-off move. However, as was the case for most other small currencies, GBP selling eased soon. Headlines from the call between UK PM Johnson and EU leaders were positive and suggest that both sides are prepared to work on a practical compromise. This better tone on the UK-EU talks and a better global sentiment might help to put a floor for sterling, at least short-term. Some consolidation in the 0.9050/0.8865 range is possible.
EUR/USD: hope on additional stimulus eases USD bid
