Markets
After a day or two of weighing the unfavorable developments of the coronavirus on the one hand and the ample fiscal and monetary support on the other, the balance finally tilted (again) to the latter. Sentiment received an additional boost from Chinese promises to step up its buying of US agricultural goods after falling behind due to coronavirus disruptions. The comments from people familiar with the matter came after US president Trump tweeted just yesterday that a full decoupling from China is still a policy option. News from the European summit was still rather scarce at the time of writing. German chancellor Merkel said that there’s an agreement the recovery fund should be a mix of loans and grants but they didn’t talk numbers. Austria’s Kurz said grants should in any case come with conditions attached. Meanwhile, ECB’s Lagarde urged EU leaders to come up with a deal or risk triggering a shift in sentiment on markets. Stock markets were the main beneficiary of today’s risk-on sentiment. EMU and US equities gain about 1%. Oil prices sprint some 2.5% higher with Brent oil ($42.55) testing the early June high. Clearing that level ahead of the weekend would bring the March upper gap ($45.18) on the radar as the next reference. Core bonds show no clear direction. German yield decline 2 bps at the front end. Peripheral spread changes to the core are negligible. The US yield curve bear steepens with yields up 1 bp (2-yr) to 3 bps (30-yr).
EUR/USD traded very quietly before spiking higher on Merkel’s comments. It pared some of the gains on more downbeat and sobering comments from Rutte. The Dutch PM downplayed the ECB’s warning and said he isn’t sure a deal would already be struck in July. The couple is trading in the 1.123 area, slightly up from this morning’s 1.12. USD/JPY is literally going nowhere near the 107 pivot. The trade-weighted dollar is changing hands near this week’s high at around 97.4. The pound held rather strong this morning after a stronger-than-expected rebound in UK retail sales (12.0% m/m or 10.2% m/m excluding fuel). A sterling recovery after hitting the EUR/GBP upper band of the sideways trading range despite yesterday’s rather optimistic Bank of England thus looked in the making but instead the opposite happened. EUR/GBP snapped higher, now filling offers in the 0.907 area. Other than a French minister saying a Brexitdeal must be fair and shouldn’t be rushed, we didn’t see any particular trigger for the trip north.
News Headlines
The Bank of Russian cut it policy rate by 100 bps to 4.5%, a record low. The bank sees a risk that inflation will significantly deviate downwards from the 4% inflation target in 2021. The interest rate decision is aimed at limiting this risk. If the situation develops in line with its baseline forecast, the Bank of Russia will consider the necessity of further key rate reduction at its upcoming meetings. The rouble gains modest ground against the dollar (USD/RUB 69.35) but this move is probably also supported by a rise in the oil price.
The UK government borrowed a record £ 55.2 bln in May. UK public debt rose to £ 1.95 trillion surpassing 100% of GDP for the first time since 1963. At that time, Britain was still paying off debt resulting from the second World War.
The ECB and other major central banks announced that they will reduce the frequency of USD liquidity-providing operations as conditions in the USD funding market have improved. From July 1 the ECB will reduce the frequency of 7 day-operations from daily to three times per week. Operations with a maturity of 84 days will continue to be offered on a weekly basis. The new schedule will remain in place for as long as appropriate to support smooth functioning of US dollar funding markets and central banks stand ready to re-adjust provision of US dollar liquidity as warranted by market conditions.
