Markets
Yesterday’s risk rally petered out. European stocks lose marginally. US equities manage a positive yet seemingly fragile open. Horrible German factory orders (-15.6% m/m vs. an expected 10% decline), a bleak European growth perspective from the EC (see headline below) and a dismal US April ADP job report dragged overall sentiment. According to the latter institute, more than 20 million jobs were lost in just one month as economic activity grinded to a standstill and is most likely a harbinger for Friday’s official payrolls report. The brunt of job losses were carried by the services sector: 16 mln job losses and more than half thereof in the leisure and hospitality sector alone. Core bonds held a downward bias however as the (announcement of) more supply overshadowed the mild risk-off. US Treasury Secretary Mnuchin will increase the amount of its quarterly refunding auctions next week to a record high of $96 bn, with a focus on longer maturities. It will also revive the 20y bond market with a $20 bn sale on May 20. The announcement comes as the US deficit is expected to quadruple to $4 000 bn dollar due to the coronavirus measures. In Germany, the first ever 15y bond auction lured bids of more than 35bn euro and is priced at DBR+22, 2 bps lower compared to initial guidance. The US yield curve bear steepens with yields advancing 2 bps at the short end of the curve and 6 bps at the 30y. Bunds underperform marginally, rising 4 bps (2-yr) to 7 bps (30-yr). Most peripheral spreads trade little changed. Greece (-6 bps) outperforms.
The euro continued to remain in the defensive one day after the German court potentially reduced the ECB’s flexibility and strength in cushioning the coronavirus blow. EUR/USD edged lower towards 1.08 already during early European dealings as the German data got public and hovered around that level for the remainder of the day. The pair is currently changing hands at 1.081. The yen remains the outperformer. EUR/JPY continued its decline as it is now testing key support around 115 (2017). USD/JPY headed towards 106 but is currently holding above that handle at 106.17. A soft euro triggered another test of EUR/GBP 0.87 but that support zone remains very solid. The couple rebounded afterwards to meet offers in the 0.874 area at the time of writing. Cable fell through 1.24 (1.238), deteriorating the technical picture.
News Headlines
According to the European Commission spring forecast, the euro area economy is expected contract by a record 7.4% before rebounding 6.25% in 2021. The decline is labelled symmetric as all member states are hit by the pandemic. However, the decline (and the expected rebound next year) are expected to differ markedly (from -4.5% for Poland and -9.75% for Greece). The EC assess that each member state’s recovery will depend not only on the evolution of the pandemic in that country, but also on the structure of their economies and their capacity to respond with stabilizing policies. According to EU commissioner for Economy, Paolo Gentiloni, ‘such divergence poses a threat to the single market and the euro area – yet it can be mitigated through decisive, joint European action’.
The Turkish lira nearing record low levels against the dollar. The decline of the lira occurred even as policy makers over the previous days took several steps to prevent a further weakening. Amongst others the banking authority further restricted foreigners’ access to lira liquidity to prevent short-selling. State Banks are also reported to sell foreign currency in the FX market. Even so, USD/TRY is heading further north to trade at 7.16, bringing the 2018 peak (7.23 area) in sight.
