Markets
Markets had to digest Monday’s impressive risk rally, causing some retracement on the previous day’s move. Stocks initially held up rather well, but (US) indices finally fell prey to profit taking on headlines raising questions on how much progress biotech Moderna has made on a vaccine against corona. Positive comments from the company where a trigger for the equity rally on Monday. Eco data (better German ZEW investor sentiment, US housing data declining roughly as expected) had limited impact. US equities closed the with losses between 0.54% (Nasdaq) and 1.59% (S&P). In a hearing before a Senate committee, Fed Chair Powell defended the Fed’s aggressive approach to fight the impact of the coronavirus. However, the Q&A showed that it won’t be that evident for US Congress to find common ground on further stimulus. US yields reversed part of Monday’s rise, with the long end slightly underperforming, keeping the steepening trend at that sector of the curve intact. German yields changed less than 2bp. Intra-EMU spreads narrowed further in the wake of the German-Franco proposal for a rescue fund. EUR/USD maintained most of Monday’s gain closing at 1.0923. USD/JPY tested the 108 level on headlines that the BOJ will hold an ‘emergency meeting’ on Friday (close 107.71). EUR/GBP lost slightly ground (close at 0.8916). A statement by UK negotiator Frost on the EU-UK negotiations confirmed recent evidence of a complete stalemate.
This morning, Asian equity markets show a mixed picture with China underperforming (CSI 300 -0.4% currently). Korea and Japan (weak yen) are outperformers. The yuan is still holding within reach of recent lows against the USD (USD/CNY 7.1050 area). USD/JPY stabilizes (107.75 area). EUR/USD stays well bid (1.0940 area). The Kiwi dollar (NZD/USD 0.6105) extends gains as RBNZ governor Orr downplayed the need for negative rates (cf infra).
Today’s calendar is thin. The US will sell a new 20-y bond. The long end of the US yield curve steepened of late. Will a successful auction pause this trend? Later in the session the Fed will also publish the minutes of the April 29 policy meeting. Some European markets will be closed tomorrow. Later this week, US and EMU preliminary PMI’s might give some insight on how companies assess the restart of the economy. However, markets gradually might give some more weight on the indicators that are related to demand (sales, labour market data) side of the economy. With central bank support still firmly in place and sentiment on risk maybe turning a bit more neutral, the rise in core yields might slow further. On the FX market, the euro picture improved this week, but a sustained break above the EUR/USD 1.1100/18 area probably remains tough. EUR/GBP settled above the 0.89 level. Given persistent tensions with respect to the UK-EU negotiations, we don’t anticipate a quick rebound of sterling. BoE’s Bailey , Broadbent and Cunliffe will testify before the Treasury Committee.
News Headlines
RBNZ Governor Or said he is open to lower the central bank rate to negative territory but not until “a lot later” and only if it deems it necessary, effective, efficient and operationally capable. His comments suggest negative rates aren’t given and come after Assistant Governor Hawkesby said the RBNZ might not need to increase QE.
South Korea’s finance minister said the country will create an SPV of 10tn won for 6 months. The SPV will buy corporate debt, including lower-rated bonds and fallen angels, maturing within 3 years and commercial paper. The government pledged to double the SPV in size if that is required.
WH economic advisor Lawrence Kudlow said that China “made a lot of mistakes” with respect to the coronavirus but assured president Trump was not abandoning the phase one trade deal over it. Since the pandemic set foot on US soil, US/Sino relations came under pressure, with Trump blaming China having done too little to prevent the spread.
