Markets
Today, the risk-rebound on global markets continued. The prospect (or is it still mainly hope?) that the lockdowns will be eased in Europe and in the US and that economic activity might gradually resume, continues to feed markets’ animal spirits. As was often the case of late, we didn’t see much concrete news or data to ‘validate’ the risk rebound. Simply the fact that the economic activity might restart, suffices. The potentially high degree of lasting economic damage further down the road has little weight in the current market assessment. The most important data (US consumer confidence and Richmond Fed manufacturing) are published just after we’ve finished this report. The US March trade balance showed a bigger than expected deficit as exports declined more than imports, but as usual, the report didn’t change markets’ assessment. This week, the corporate earnings season is coming into full swing with plenty of bellwethers reporting. In line with current sentiment, markets focus on the positive surprises even as others warn on a big fall in Q2 activity and a little visibility on what might happen further out. The (US) oil futures show this market remains in disarray. Still, equities continue their march north. European indices show gains between 1.5% and 2.5%. Major US indices opened with gains of 1%+. Remarkably, the risk rally this time didn’t cause any rise in core bond yields. US yields decline about 3 bps across the yield curve. The German yield curve steepens slightly (2yr -2.8 bps, 30yr unchanged). The trend of intra EMU spread narrowing after Friday’s ‘clement’ assessment of rating agency S&P on Italy’s creditworthiness is also extended, albeit at a slower pace. Italy and Greece (-6 bps) remain outperformers.
Core bonds didn’t follow the standard risk-on procedure, but the dollar did. The trade-weighted dollar (DXY) dropped below a first minor support area just below 100 (currently 99.60 area). Despite the risk-on, USD/JPY slipped below 106.93, the bottom of a ST sideways consolidation pattern, accelerating selling (currently 106.65 area). EUR/USD also profited from the overall USD softness. The pair is trading in the 1.0865/70 area, but a break of intermediate resistance near 1.09 didn’t occur. EUR/JPY (115.90 area) remains in the defensive, indicating that the euro is still no outperformer in this environment of broad USD weakness. The sterling performance was more or less in line with the euro. EUR/GBP is testing the 0.8700 area, but for now no break occurred yet. CBI data showed the biggest drop in sales for UK retailers since 2008. Headlines/rumours on the UK-EU brexit talks suggest that the stalemate persists.
News Headlines
The Swedish Riksbank decided to continue purchases of government and mortgage bonds up to the end of September 2020 and leave the repo rate unchanged at 0%. Interest rates are expected to remain unchanged/low in the foreseeable future. Major uncertainty regarding how deep and prolonged the economic decline caused by the coronavirus will be, made the Riksbank come up with a second, more pessimistic scenario in which growth will fall by 9.7% this year while only rebounding by 1.7% in 2021. Inflation will remain way below the 2% target. EUR/SEK fell from 10.85 to 10.70 after the decision as the Riksbank backed away from returning to its negative policy rate experiment of the past lustrum.
The Hungarian central bank kept policy rates unchanged today (deposit rate: -0.05%; refinancing rate 0.9%), but released details of its new secondary bond market purchase programme which will start May 4. The program is open-ended and focuses on maturities longer than 3 years. The programme will be reviewed after reaching 1tn HUF or if no longer necessary to counter the economic damage done by the coronacrisis. The Hungarian forint only weakens marginally at EUR/HUF 356. The Hungarian swap curve bear steepens (buy-the-rumour; sell-the-fact?).
