Markets
European markets initially performed rather well in a catch-up move with a late rally on Wall Street yesterday. Stocks opened well in the green, core bond yields cautiously eked out gains. Those upward moves soon petered out however, more and quicker so in bond yields than in equities. A Reuters report (cf. infra) later fueled fears of US/Sino trade tensions further escalating. Stock markets slashed gains sharply, core bond yields extended their initial slide. Germany printed a -2.2% q/q growth decline (-2.3% y/y), thus entering a technical recession due to a downward revision of Q42019 to -0.1% q/q. With a much worse second quarter to come, markets were quick to dismiss the already outdated report. US April retail sales triggered a little more price action. Both headline and core series slipped into the double digits, ranging from -15% to -17% m/m. Among the steepest drops are clothing (-80% after already halving in March), electronics and furniture (both -60%) and the eating and drinking business (-30%). The sole category out of 13 printing a (strong) rise is unsurprisingly the non-store (online) retail (+8.4% m/m). Industrial production fell -11.2% m/m in the same month with a drop in almost every subsector though most notably in motor vehicles and parts (-72% m/m). Nevertheless, USTs came under pressure and gave up intraday gains by the time US dealers joined the market. Yield changes are negligible. The German Bund outperforms today. Yields are litte changed at the short end and decline -2 bps at the 30-yr. Peripheral spread changes to core are marginal. Italy (+4 bps) underperforms.
The US dollar traded rather muted in the run-up to this week’s calendar apex. EUR/USD oscillated around important support near 1.08. A weaker greenback in the wake of the US retail sales eventually pushed the couple higher to trade at 1.084 currently. EUR/USD 1.08 has been tested numerously this week but it looks set to survive the weekend. The trade-weighted dollar does manage to keep the 100 barrier dry (100.2 currently, unchanged vs. yesterday’s close). USD/JPY returns Thursday’s gains and trades just shy of 107. The pound sterling came under additional selling pressure. After this week’s talks, Brexit negotiators Frost and Barnier seem to agree on nothing but one thing: there has been little to no progress. EU’s Barnier said he’s not optimistic about talks going forward. The UK repeated unwillingness to ask or even accept an extension to the transition phase, which runs until the end of this year. EUR/GBP easily captured resistance around 0.886 and is currently even testing the 0.89 area. A break going into the weekend would improve the technical picture. Cable dips below 1.22, testing support around 1.2166 (April low).
News Headlines
According to the German Handelsblatt, European governments disagree on which companies will be eligible for guaranties for the European Investment Bank. Germany wants the guarantees only to be provided to SME’s as the country fears that funds will be exhausted to quickly if large firms can use the guaranties. France, Italy and Spain also want large companies to be eligible. European finance ministers will discuss the topic on Tuesday.
According to Reuters, the Trump administration was taking steps to block shipments to China’s Huawei Technologies of semiconductors that are made using US software technology. If Huawei wants to continue to receive chips or other semiconductor products with certain US software or technology, it needs a license from the US Commerce Department. The US said the change aims to prevent US technologies from enabling malign activities contrary to US national security and foreign policy interests. The step taken today, concludes a week when president Trump raised several topics of discord between the two nations, causing extra uncertainty for markets that are pondering the economic damage from the corona crisis.
