The market mood somewhat bettered on prospects of business reopening, as US President Donald Trump said they need to get the economy running despite more people being affected by the virus.
But the sentiment remains fragile, as today’s ADP report should confirm more than 20 million private job losses in the US last month – enough to dampen the mood despite the US’ all-in monetary and fiscal support to prevent the economy from falling to pieces.
The European Central Bank (ECB) on the other hand responded to German’s court judgement which asked the bank for proof that its Quantitative Easing has not gone beyond the law. The ECB’s governing council pledged that they would continue doing anything necessary to revive inflation. But Draghi’s ‘whatever it takes’ may be running into a brick wall as the ECB’s biggest weapon to revive inflation deals heavily with government debt, and crosses a fine political line.
In fact, the German discontent with the ECB’s massive bond purchases program is nothing new, but it takes another dimension as the German court now clearly declared the ECB’s Public Sector Purchases Program (PSPP) which has started in 2015 as partially illegal, provided that the spending is not approved by the government nor the Parliament. According to Germans, the ECB may have gone too far, well beyond its mandate, as its actions severely impact the financing by government debt, and it indeed is a political issue.
Hence, yesterday’s German court decision raised concerns that the Bundesbank may not participate in the bond purchases program, unless the ECB’s Governing Council ‘adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.’
Now, it is important to highlight that the German court didn’t consider the ECB’s PSPP program as a violation of the ban on monetary state financing and will probably continue contributing to the program, while waiting for a justification of proportionality from the ECB council within the next three months. But during this period, the upside potential of the single currency will likely be limited, as the risks of Germans not accepting the ECB’s justifications will remain on the back of any euro holder’s head. More importantly, however, the German decision on PSPP gave a warning that the current PEPP program may also be at jeopardy. As such, the German court targeted the PSPP, but may have hit the PEPP. And, if the ECB’s scope of action narrows, the European economies may lose the much-needed support from the ECB. Especially provided that the finance ministers have recently failed to seal a clear, satisfactory deal on the fiscal deck.
The EURUSD tanked to 1.0825 following the German court decision and traded in the tight range of 1.0830/1.0845. Euro bears have the green light from data to continue selling this morning; the German factory output plunged 15.6%m-o-m in March versus -10% expected by analysts and -1.4% printed a month earlier. Later today, the European services PMI are expected to reiterate the sharpest contraction in activity on record, while the retail sales are expected to have plunged by more than 10% m-o-m in March. Hence, soft European data should further boost the euro bears’ appetite, amid rising concerns about the ECB’s ability to act more to throw a floor under the tumbling economic activity.
Elsewhere, the Indian services PMI plunged to 5.4 in April, versus 40.0 expected by analysts and 49.3 printed a month earlier.
US and European equities closed Tuesday’s session on a positive note, but activity in the futures market hints at a bearish start in Europe.
Cable remains under a decent selling pressure as the possibility of a no-deal Brexit becomes clearer by the day. Ahead of us, the Bank of England (BoE) decision should see little reaction as the bank is expected to stay pat, but investors are worried to hear the confirmation that the lockdown in the UK will be extended until the first week of June and continue shattering the UK’s services-heavy economy.
Gold fluctuates around the $1700 per oz.
WTI crude recovered to $26 a barrel. Due today, the US oil inventories are expected to have increased less than 10 million barrels for the second week as a result of an apparent slowdown in production. Slower global supply and the prospects of business reopening are giving a boost to historical low oil markets, but the reality could hit back when the time will come for the physical delivery on May 18th. This is when we will see how much of the actual appetite for oil is real.
