Markets
Today’s eco calendar was again rather thin, particular in Europe. However, several central banks (SNB, Norges bank and the Bank of England) held regular policy meetings and the ECB held its first new TLTRO liquidity providing operation under more favourable conditions as announced in April. Trading on global markets was still dominated by the uncertainty on a potential impact of recent rise in the number of corona infections especially in China but also in the US and Brasil. This morning in Europe, sentiment wasn’t that bad, amongst others, as there were comforting comments from Chinese experts that the new corona outbreak in Beijing was under control. However, the constructive sentiment couldn’t be maintained going into the US trading session. The US data were mixed with the weekly jobless claims printing higher than expected (1.508 mln new claims) while at the same time the Philly Fed business outlook suggested quite a solid recovery in this part of the economy, rising from -43.1 to 27.5 vs -21.4 expected. Even so, sentiment stayed risk-off. As was mostly the case of late, the US yield curve bull flattened in this environment with yields declining between 0.6 bp (2-y) and -6 bp (30-y). However, LT US yields still remain with the established trading ranges that guided trading of late.
In Europe, banks borrowed € 1.31 trillion of thee-year funding from the ECB under its redesigned TLTRO funding scheme. The take-up was more or less in line with market expectations and had only limited impact on European interest rate markets. European bond markets were also mainly driven by overall risk sentiment. The European yields curve bull flattens too, but underperforms the US with yields declining between 0.2 (bp) and 3.5 bp. Intra-EMU peripheral spreads of the likes of Italy narrowed in the run-up to the release of the ECB TLTRO outcome. However, from there quite some good news was already discounted also for that part of the market. At the same there still is some noise from the political scene as some EU members (Sweden) reiterated their objections the structure of the new EC rescue plan that will be discussed at the EU summit. In the end, intra-EMU spreads narrowed only modestly (Spain and Portugal -3bp; Italy -1bp).
On the FX market EUR/USD tried to move away this morning from recent bottom levels in the low 1.12 area. However, the risk-off bid for the US dollar this afternoon blocked any further gains. The pair is again trading in the 1.1225/30 area. Sterling weakened this morning as investors awaited the BoE policy decision. The Bank left its policy rate unchanged at 0.1%, but as expected raised the amounted of government bond purchases by £100 bln, bringing the target for stock of purchases to £745 bln. The tone of the BOE assessment was relatively upbeat. The bank also didn’t give any hints that is preparing other unconventional policy measures (negative interest rates or yield curve control). Sterling tried to regain some ground immediately after the BOE announcement. However any further gains were almost immediately blocked as global sentiment turned further negative this afternoon. EUR/GBP (0.9025/30 area) even trades again higher than the pre-BOE levels (0.9030 area).
News Headlines
The Swiss National Bank left policy rates steady at -0.75% today. 2020 GDP will probably contract with 6% this year due to the horrible first 6 months of the yea. The recovery will start in Q3, assuming no new virus waves take place. Inflation is expected negative this year and the next. The SNB reiterated its willingness to intervene more strongly in the currency market to prevent the currency from strengthening too much and thereby weighing on the economy.
Norway’s central bank kept rates at the zero lower bound and intends to keep them there for the next couple of years. Interestingly, the Norges Bank didn’t only highlight downside (second wave) risks to the outlook. It sees the economy recovering faster than expected. Should this trend continue, it might raise rates faster than currently envisioned. The central bank also warned for financial stability risks posed by low rates for a prolonged period.
