Markets
Global investors maintained a guarded approach yesterday as they pondered the impact of a rise in corona inflections in some US states and in China resulting in a modest risk-off. There were few data in Europe. US data were mixed. US initial (1.51 mln) and continuing (20.5 mln) jobless claims printed again higher than expected but the Philly Fed business outlook suggested a bold rebound in activity. US equities finally closed the session little changed in rather low volume trading. The US yield curve continued its bull flattening trend with US yields declining between 0.2 bp (2-y) and 4.8 bp (30-y). In Europe, banks borrowed € 1.3 trillion of 3-y funding under the modified ECB TLTRO lending scheme, designed to support the flow of cheap credit to the economy. The direct impact on markets was modest. German yields were little changed at the short end of the curve but declined up to 3.5 bp for long (30-y) maturities. Ample liquidity after TLTRO borrowing might continue to support demand for peripheral EMU bonds. 10-y spreads from the likes of Spain and Italy declined another 3/2 bp. The dollar maintained the benefit of the doubt with EUR/USD struggling not to fall below the 1.12 handle (close 1.1205). The Bank of England as expected raised the target amount for asset purchases by £ 100 mln. However, the bank was less negative on the economy than in May and didn’t discuss negative rates or yield curve control. Remarkably, the less dovish BOE assessment didn’t help sterling. EUR/GBP closed at 0.9019.
Overnight, USD president Trump said that US still considers the option of complete decoupling from China, despite constructive talks between officials from the two sides earlier this week. Still, Asian equities mostly show limited gains this morning. The yuan is trading little changed against the dollar (USD/CNY 7.0875). Australian retail sales rebounded forcefully in May (16.3%), but failed the inspire the Aussie dollar (AUD/USD holding in the 0.6850/60 area). The Japanese government turned a bit less negative on the economy. Still USD/JPY is keeping a tentative negative bias (USD/JPY 106.85). EUR/USD is holding in the 1.1210 area.
Today’s eco calendar is thin In Europe, markets will look for headlines from the EU summit discussing the framework of an EU €750 economic support package. Internal discussions between member states on whether/how much of the aid should be distributed via loans or grants almost certainly won’t be solved today. Global sentiment will also still be guided by the headlines on evolution of corona infections, especially in the US. US equity futures currently show limited gains. However, this probably won’t be enough to trigger a real countermove on recent flattening trend on US and (Europe) bond markets. The dollar remains well bid, but we don’t expect EUR/USD to drop below the 1.1160 key support area. We are a bit puzzled on yesterday’s post-BoE decline of sterling. In a day-to-day perspective, we don’t see much of a driver for further sustained sterling losses. EUR/GBP might hold near the 0.90 reference. Better than expected UK retail sales as published this morning might support sterling, too.
News Headlines
US President Trump countered comments from US Trade Representative Lighthizer, tweeting that a complete decoupling from China is still an option on the table. Earlier, Secretary of State Pompeo met with Chinese officials from whom he sought confirmation China would still hold up to the phase one trade deal.
US House Democrats presented a $1.5 tn infrastructure plan to rebuild not only roads and bridges but schools, funds for water projects and hospitals. Speaker Pelosi hopes for bipartisan interest and urges president Trump to engage in negotiations on how to pay for the plan. The House is scheduled to vote on the plan before the July 4 recess.
The Japanese government said its economy may have improved last month and is “showing signs of less deterioration”. While still in an “extremely severe situation”, the economy’s June assessment was upgraded by the government, bolstered by a more positive view on consumption and investments. It’s the first raise since 2018.
