Markets
Two themes dominate headlines today: yesterday’s FOMC meeting and growing fears about a 2nd wave of coronavirus infections in the US. Fed Chair Powell presented a dire economic future while cementing forward guidance on policy rate (unchanged through 2022: “not even thinking about thinking about raising rates”) and asset purchases (remain open-ended; at least current pace of $20bn/week in US Treasuries). The dovish message was the first supporting factor for core bonds. The second one came from risk aversion as experts warn that evidence of a second wave was building in Arizona, Texas, Florida and California. European equity markets gapped lower from the start and currently lose 3% to 4%. Main US markets lose 2.5% at the start. German Bunds outperformed US Treasuries today in a catch-up move with the UST rally after the FOMC yesterday. The move accelerated after US President Macron supposedly (Le Figaro) is looking to call snap elections to strengthen his political mandate. He will probably address the French nation on Sunday. The looming US 30-yr bond auction, which concludes this week’s mid-month supply operation, could be at play as well from the US side. The US yield curve flattens with daily changes varying between +0.8 bps (2-yr) and -6.7 bps (30-yr). The German yield curve bull flattens with yields dropping by 3.3 bps (2-yr) to 9.5 bps (30-yr). 10-yr yield spreads vs Germany are barely changed. Investors aren’t worried yet by the possibility that fresh French presidential elections could weaken the German-Franco European axis and interfere with the search for consensus on the EC’s recovery fund proposal.
The dollar has troubles choosing sides today. Weakness on yesterday’s dovish Fed signal hangs in the balance with strength in a risk-off environment. The mere nature of the risk aversion means potential trouble ahead for the US (currency) though. The trade-weighted dollar chops up and down between 96 and 96.50. The mirror image in EUR/USD is volatility between roughly 1.1350 and 1.14. The single currency is also undeterred by the Macron story. USD/JPY gave away the 107 handle. US weekly jobless claims decline to around 1.5 million, but continuing claims more or less plateaued around 21 million. They didn’t impact today’s trading. Sterling underperformed in today’s risk-off market environment with EUR/GBP steaming towards 0.90 resistance.
News Headlines
German Chancellor Angela Merkel discussed a broad range of topics in a video call with Chinese Premier Li, but the focus was on trade issues. Merkel highlighted the need for further steps on market access, reciprocity and equal treatment of foreign companies. The German Chancellor also advocated a rule-based and free multilateral trade and a strengthened World Trade Organization. Germany still aims to conclude an ambitious investment agreement between the EU and China. Germany holds the six-month rotating EU presidency in July. Tensions between the US and China were not explicitly mentioned as a topic of the discussions.
Press articles rumour that French President Macron on a call with donors raised that idea that he might resign and call a snap election. The French president has still tow year left of its five-year mandate.
Swedish inflation printed higher than expected in May. Headline inflation was reported at 0.0% Y/Y, rebounding from -0.4% Y/Y in April. Prices on a monthly basis rose 0.6%. CPIF inflation excluding energy rose from 1.0% to 1.2%. There is uncertainty on the report as it is difficult for the statistical agency to collect data from some parts of the economy that were highly effected by the impact of the coronacrisis. Still, it might ease pressure on the Riksbank to ease policy further. The Swedish krona weakened to the EUR/SEK 10.50 area, but this was due to the global risk-off sentiment rather than country specifics.
