Markets
Today’s sentiment on (equity) markets remained positive still ignoring the flood of dismal eco data due to the lockdown measures. Investors took some conformed from constructive headlines after a meeting/call between US and Chinese officials on trade, easing fears for an escalation of the trade war. At the same time markets kept their positive assessment on the restart of the economy. Even uncertainty on the consequences of recent easing of restrictions in some countries (rise in corona cases in the likes of Spain) didn’t worry investors. Regrading the data, the focus turned the US payrolls report. The US economy lost 20.5 mln jobs raising the official unemployment rate to 14.7%. Both the reported job losses and the unemployment rate were a tad better than the consensus estimate. However, giving the wide divergence among forecasters, the report still can labeled as in line with expectations. Some components were also affected by ‘statistical issues’ (rise in average hourly earnings). The market reaction to the report was modest, but constructive. US equity futures initially maintained intraday gains after the release, but ceded some ground as the cash market opened. Major US indices show gains of about 0.50%/1.0% shortly after the open. European equity indices gain about 1%. The US yield curve shows a modest steepening, but yields preserve most of yesterday’s decline. The US 2-y yield even declines 1bp. 30-y gains 3bp. At the short end of the curve, FF-futures for 2021 still show slightly negative implied yields. The debate whether the Fed should consider negative interest rate lingers even as some technical factors might also be in play. The German yield curve also steeps a few ticks (-1.5 bps for 2-y, +1bp for 30-y). Interestingly, intra-EMU spreads tightened today even as Moody’s will give a rating review on its Baa3 credit rating for Italy later today. Maybe markets took some confirmed from a meeting a of the EU finance ministers preparing a concrete framework to kickstart funding via the ESM mechanism. BTP’s outperform with the 10-y Italy-German spread narrowing 11 bp.
Moves in the major FX cross rates mostly remain rather limited and develop within established ranges. EUR/USD is holding a tight range roughly between 1.0820/50. USD/JPY (106.65 area) captured a better bid after the US payrolls report, probably inspired by the small rise in LT US yields after the payrolls. EUR/GBP hovers in a tight range in the mid 0.87 area, but UK markets were closed today.
News Headlines
Eurogroup president Centeno said EMU finance ministers are considering a maturity of up to 10 years for the ESM credit lines. The ESM is part of Europe’s response to the coronacrisis and comes with little strings attached when tapping the credit lines. However, many mostly southern European countries are unwilling to resort to the mechanism, instead pushing for grants rather than loans.
The ECB asked its staff to conduct a study whether it should buy bonds that have been downgraded to junk due to the pandemic, sources said, mimicking policy by the Fed. The ECB recently expanded its collateral pool to include this so called fallen angel debt. The study is expected to be discussed by policymakers at short notice.
Canadian employment slumped nearly 2 million in April, doubling the March job loss but half the 4 million markets were expecting. Unemployment soared to 13%, just short of the ’82 all-time high of 13.1%. The participation rate tanked to 59.8%, the lowest ever. The Canadian dollar’s reaction was extremely muted (USD/CAD 1.395).
