Markets
Risk sentiment turned its back to negativism about rising COVID-19 numbers and around geopolitics (North/South Korea & India/China). Extremely easy monetary and fiscal policy stances are here to stay. As ECB governing council Member Panetta put it: the ECB didn’t unleash the full monty yet. He confirmed comments by ECB Lagarde that a discussion on buying fallen angels (corona-junked corporate debt) didn’t happen yet, but that they will consider it if necessary to reach the central bank’s inflation objective. The Fed yesterday extended the scope of its Secondary Market Corporate Credit Facility to include individual corporate bonds. To date, it only purchased ETF’s tracking the corporate bond market. The Bank of Japan expects the amount of lending under its crisis programme to rise from 75 to 110 trillion. The central bank signals triggered a 3.5% rebound on most European stock markets. German and US economic data provided something to cheer for as well. Forward-looking German June ZEW investor expectations increased from 51 to 63.4. In four months’ time, the indicator spiked from the lowest level since 2011 to the highest reading since 2006! The German additional fiscal spending bill clearly creates hopes of a swift recovery in the second half of the year. The current expectation index marginally improved for the first time since the corona-outbreak, but remains near all-time lows. US May retail sales recovered more swiftly (17.7% M/M) from their three-month weakness and historic crash in April (-14.7% M/M). Pent-up demand was at work as stay-at-home orders ended. Details showed improvement across all categories. Retail sales remain some 8% below pre-COVID levels, suggesting that the consumption drag on GDP will be significant. The bounce in industrial production was way less impressive at 1.4% M/M with the capacity utilization rate only marginally increasing (64.8%) from last month’s downwardly revised 64% (lowest since records started in 1967).
Stronger than expected US retail sales tipped the balance in favour of the dollar despite better risk sentiment. EUR/USD neared 1.1350 at the start of European trading, but changes hands now below 1.13. The euro isn’t in too good shape overall today. Gains in USD/JPY are disappointing (107.40). Sterling benefits from risk sentiment and constructive brexit talks between EU leaders and UK PM Johnson. They outweigh the May UK employment report which shows surging jobless claims. EUR/GBP turned lower in the past month’s trading band (broadly between 0.8850 and 0.90). Core bonds lost ground with US Treasuries significantly underperforming German Bunds. The US yield curve bear steepens with yields rising by 0.7 bps to 8.7 bps. The German yield curve shifts in similar fashion but with increases limited to +2.9 bps. Peripheral yield spreads vs Germany narrow by up to 9 bps.
News Headlines
The Spanish minister of finance said she’ll allocate some 2.5bn euros to boost tourism sector. The statement comes after prime minister announced a 3.75 bn euro stimulus program for the car industry yesterday. Tourism and the car sector are two of the hardest hit sectors by the coronavirus and account for more than a fifth of Spain’s GDP.
The Polish central bank (NBP) kept monetary policy settings steady after a surprise rate cut brought policy rates to a mere 0.10%. The NBP acknowledged the improvement in sentiment and gradual recovery of the economic activity against the backdrop of loosening quarantine measures. However, the considerable amount of uncertainty going forward and declining inflation (-0.1% m/m in May) continues to warrant very easy monetary policy.
Hungary’s parliament revoked the special powers granted to PM Orban’s government in late March to deal with the pandemic. The daily change of new cases fell sharply over the past few weeks to just 7 yesterday. Some of imposed measures will remain in place however, including a moratorium on all loan repayments until the end of the year.
