Markets
Except for the overnight US/Sino trade headlines that whipsawed markets, PMI confidence indicators were today’s main market mover. The series showed a better-than-expected continued rebound from the historical lows towards 46.9 in the EMU manufacturing sector and 47.3 in the services sector as lockdown measures are being unwound and companies reopen. The measures remain below the neutral 50 level however (except for France’s reading) and details suggest ongoing slack (new orders still decline, relative improvement in employment component far more modest). For markets however, the key takeaway was that the situation was the least bad in almost 4 months, adding to the conviction of the recovery being underway. It added to an already bright mood at the start of European dealings. European stocks soar more than 2.5%, US equities add about 1% with the Nasdaq opening at a record high. Core bonds lose ground with the German Bund underperforming US Treasuries. The German yield curve shifts north with yields rising about 2 bps at the short-to-medium end of the curve and 3.1 bps at the very long end (30-yr). Peripheral spreads narrow a few basis points with Italy (-3 bps) taking the lead. The US yield curve bear steepens with yields up to 1.3 bps (30-yr) higher.
The US dollar extended its slide that began at the start of the week as risk-on reigned. EUR/USD was evidently supported by a well-bid euro. The couple hovered near the 1.126 technical zone which it smashed after the PMI indicators were released. A second upleg occurred in early afternoon trading as US investors joined, pushing EUR/USD out of the downward trend channel towards 1.133 in what looks as mainly dollar weakness. From there on, there’s only a minor technical resistance zone around 1.135/6 in the run-up to the June high of 1.1422. The trade-weighted dollar staged a similar double-legged trading pattern. DXY declines from the 97 area towards 96.55, testing an important support area (76.4% retracement). Interestingly, USD/JPY fails to profit from today’s risk environment. The combination rose in early Asian trading after Trump sought to reassure markets about the trade deal, but staged a sudden deep dive in an at least partially driven technical acceleration below 107. USD/JPY is setting a new June low at 106.33. The British pound remained under pressure despite UK PMIs also beating expectations (50.1 manufacturing, 47 services) and even as PM Johnson provided the country with perspective of a looser lockdown policy. A strong euro kept EUR/GBP upwardly oriented however. The currency pair extends gains beyond the upper bound of the sideways trading range to change hands at 0.907. Cable (1.2485) is trading choppy around opening levels.
News Headlines
The Hungarian central bank (MNB) cut its base rate by 15 bps to 0.75%. The MNB thinks that the inflation outlook shifted persistently downwards while economic growth will this year be more subdued than earlier expected. The Hungarian forint already was in a weak spot ahead of the meeting and weakened further afterwards with EUR/HUF passing the 350-mark for the first time since the end of May.
UK PM Johnson told the House of Commons that strict lockdown measures will be dramatically loosened from July 4. Pubs, restaurants, cinemas and other indoor venues will reopen, households will be able to meet indoors with one other household and the two-metre social distancing restriction will be relaxed. Schools will fully re-open in September while restrictions on indoors performances and the opening of gyms will remain.
