Markets
More countries (France, Greece, Spain) revealed their exit strategies yesterday evening, providing light at the end of the tunnel. High frequency data, such as electricity use, also suggest the likes of Italy and Spain have seen the bottom for now. However, investors already anticipated this gradual economic revival to a quite large extent. Markets thus struggled for direction at the start of European dealings, awaiting more guidance from the US GDP release. US growth contracted 4.8% q/q annualized in the first quarter. The first contraction since 2014 came in slightly worse than expected. Private consumption slumped as consumers were ordered to stay at home, shaving as much as 5.26 percentage points off economic growth. Investments contributed a negative 0.96 pp while net exports (+1.3 pp due to a steep decline in imports) and government consumption (+0.13 pp) provided a marginal counterbalance. The Q1 growth figure was overshadowed by the simultaneous publication of new “positive test results” from the touted Gilead medicine Remdisivir. The report lifted waning sentiment, pushing stocks up to 2% higher (in the US). Core bonds left their intraday highs but still trade higher compared to yesterday’s close. The US yield curve bull flattens with yields declining 1 to 2 bps across the curve. German yields slip more or less the same amount. Peripheral spreads to the core trade mixed with Spain (-4 bps) outperforming. Italy (+5 bps) suffers from a downgrade by Fitch.
EUR/USD had a pretty good morning, eking out gains towards the high 1.08 area despite the risk rally taking a breather. The dollar succeeded a marginal comeback by noon before the Gilead report boosted market optimism again. The couple is currently trading in the 1.086 area, up from 1.082 this morning. The trade-weighted dollar (DXY) trades below 100 (99.69). USD/JPY trades a tad lower around 106.7. EUR/JPY (115.88) looks set for a test of 116 after giving up that support yesterday. EUR/GBP rebounded from the 0.87 support area towards an intraday high of 0.875. Foreign secretary Raab said it’s too early to already set out a strategy to lift the lockdown measures. He also repeated unwillingness to extend the current Brexit deadline. Both comments likely weighed sterling down. The currency pair is filling bids near 0.873 at the time of writing. Cable was whipsawed, trading almost unchanged at 1.244.
News Headlines
The Belgian economy shrank 3.9% (QoQ) in the first quarter of this year, the biggest contraction on record as quarantine measures to stem the spread of the coronavirus brought one third of the Belgian economy to a standstill. The construction sector was the hardest hit, with the sector’s value added dropping 6.6%. The value added in industry and services fell 3.5% and 3.6% respectively. The NBB warned for an even gloomier second quarter with GDP expected to drop a whopping 15%.
The BoJ is setting up a new scheme to reward commercial banks for lending to small businesses crippled by the coronacrisis via the government’s cheap loans programmes, to encourage further lending, Kuroda announced. More specifically, it aims to finance loans those loans and would pay the banks that boost lending 0.1% interest.
Eurozone economic sentiment plunged by a record of 27.2 points to 67 in April as the corona pandemic dealt a blow to the bloc’s economy. The biggest drop was in the services sector (-35 from -2.3), which represents around 2/3rd of the bloc’s GDP. Sentiment in industry and retail trade tumbled to -30.4 (from -11.2) and -28.3 (from -8.6) respectively. The survey also showed job concerns among consumers with unemployment expectations jumping 40.2 points to 63.
