Markets
European investors returned from the long Easter weekend but had little to catch up with from a rather dull Monday US session. The lack of eco (data) impetus extended yesterday’s trading conditions. Many European stock market currently gain around 1% with US equity futures pointing to a positive opening as well despite earning misses by JPMorgan and Wells Fargo. Both US banks reported tumbling profits mainly because of spiking loan loss reserves. The IMF classifying the “great lockdown recession” the most severe since the Depression didn’t hurt sentiment either. The classic risk correlation between stocks and bonds wasn’t present today. Core bonds eked out gains. Eurex temporary had to halt trading in European bond futures due to a technical issue, further depressing already low volumes. US yield currently decline by 0.9 bps (2-yr) to 3.4 bps (7-yr) with the belly of the curve outperforming the wings. The German yield curve bull flattens with yields 0.5 bps (2-yr) to 3.3 bps (30-yr) lower. Peripheral yield spreads vs Germany widen by 6 to 8 bps for Portugal and Spain, 11 bps for Greece and 14 bps for Italy. The Italian government will ask parliament a second time for (an even larger) deviation of the budget deficit targets agreed with the EU. Part of the next economic relief package will be financed by around €10bn of EU funds. The FX market showed a small extension of the dollar’s topping off pattern. The trade weighted dollar briefly dipped to 99. The Fed yesterday evening announced a lower frequency of USD repo operations as last month’s market stress is gone. EUR/USD set a minor short term high at 1.0976.
EU Barnier and UK Frost, chief brexit negotiators, will hold first talks in over a month tomorrow. The two will set out a timetable for virtual negotiations on their future relationship. The UK is currently set to leave the EU by the end of the year unless both agree on extending the current transition period for maximum two years. The would keep the UK in the EU single market and customs union. The Brexit treaty spells out that such extension can only be agreed upon once and should be done so before the end of June 2020. While not being UK PM Johnson’s preferred scenario, the probability of a (short term) extension seems to be rising because of precious time lost due to the corona pandemic. EUR/GBP briefly traded below 0.87 today (for the first time since March 10), before returning to the low 0.87 area.
News Headlines
Beaten down by the “Great Lockdown” crisis, the IMF warned the global economy faces the worst contraction since the Great Depression of the 30s. The organization predicts the global economy to shrink 3% this year – in stark contrast with its 3.3% expansion forecast in January – before rebounding in 2021 with 5.8% growth although prospects for a rebound are clouded by much uncertainty. The IMF sees the Chinese economy expanding 1.2% in 2020 and the US & Eurozone economies shrinking by 5.9% and 7.5% respectively.
The Office for Budget Responsibility (OBR) expects the UK economy to contract by 35% in Q2 and the unemployment rate to soar to 10% due to severe lockdown measures. In addition, it forecasts the budget deficit to widen to £273bn in the 2020/21 tax year, equivalent to 14% of the country’s GDP, the largest gap since WWII.
The BoJ is reportedly mulling new measures to ease corporate funding strains at this month’s rate review. The central bank seeks to pump more money into businesses, considering boosting its corporate bond and commercial paper purchases further and expanding the scope of securities it accepts as collateral in offering loans to financial institutions.
