Markets
Sentiment on global markets turned for the worse going into the month of May. Last month, the countdown to an easing of (some) lockdown measures and massive fiscal and monetary support to keep the economy afloat, supported a rebound in risky assets (or was it at least partially a short-squeeze?). Especially US equity markets finally discounted quite a positive recovery scenario even with super-easy monetary conditions to persist for very long. Some mixed earnings from tech bellwethers made investors more cautious. The US stepping sharpening knifes toward China with US president Trump even considering new sanctions/tariffs was an obvious trigger to push equities down the hill. Considering the negative impact on supply chains of last year’s episode in the trade war, a similar new risk evidently isn’t what markets are waiting for. European equities had quite some negative catching up to do after the long weekend with major indices losing about 3-4%. EMU PMIs were confirmed at the extremely low levels of the preliminary releases. The oil price rebound running into resistance didn’t help. US equities added losses of about 0.5%-1.0% after Friday’s steep decline, but futures are off the intraday lows. Remarkably, the risk-off this time didn’t support core bonds. US yields rise 1-2 bps across the curve. German yields even underperform with the curve steeping. 2-year German yields are rising 1.5 bps. The 30-y yield is up 5.5 bps. The move is probably in the first place a correction after last week’s decline. Uncertainty on the outcome of the German court ruling on ECB bond purchases might have been a source of investor caution toward EMU bond markets. Even so, spread widening on intra-EMU bond markets remains modest with Spain and Portugal rising 3 bps.
The major currency cross rates were in a place of relative calm. In Asia, it looked like the dollar could gain from the renewed trade tensions with the TW dollar (DXY) rallying to the 99.30/40 area. However, there were no follow-through gains. After an initial loss, EUR/USD settled in a tight directionless trading in the 1.0925/50 area. So did USD/JPY (106.85 area). Most smaller currencies regained some ground intra-day after being under pressure this morning. Sight deposit data from the Swiss National Bank suggested the SNB is still conducting substantial interventions to prevent a further strengthening of the franc. Still, EUR/CHF is holding within striking distance of the recent lows (currently 1.0550 area). Sterling continues to struggle/underperform with EUR/GBP holding near recent correction top in the 0.88 area. A global risk-off and lingering uncertainty on the UK exit path and on Brexit remain potential sterling negatives.
News Headlines
Hong Kong printed the biggest growth contraction on record, slumping 5.3% q/q or 8.9% y/y. Hong Kong, already plagued by social unrest in 2019, saw household spending tumble 10.2% y/y, investment falling another 13.9% y/y (after already double digit declines in most of 2019) and trade contracting (both import and export about 10% y/y down) as the pandemic took a heavy toll.
In the ECB’s Q2 survey of professional forecasts inflation projections were slashed to 0.4% (from 1.2%) for the current year to reach only 1.4% at the end of the policy horizon in 2022 (vs. 1.5% previously). Growth is expected to contract -5.5% in 2020 (vs. 1.1%), followed by a revival next year of 4.3% (vs. 1.2%) and 1.7% in 2022. Unemployment is likely to soar to 9.4% this year before gradually edging lower in 2021 (8.9%) and further in 2022 (8.4%).
Spain’s PM Sanchez’ plans to extend the state of emergency, which is to expire on May 10, a third time with another two weeks triggered political backlash from the main opposition. The PP, crucial to give Spain’s Socialists enough support for the measures, urged a return to policy through legislation. Sanchez’ proposal will be discussed on Wednesday.
