Markets
In what can be seen as an indirect response to the German court ruling, the ECB judged that the APP was the best way to revive the economy and inflation, the June minutes showed. In the meantime, the central bank agreed to provide the Karlsruhe court with a more direct answer and will hand over non-public documents it used to substantiate its bond-buying programme before the ECJ. The minutes further revealed some reservations among officials on the PEPP expansion announced last month. Policy makers at the same time felt that market expectations were thus high that “not acting at the present meeting could trigger a further tightening of the financial conditions”. The impact of the minutes on today’s trading session stayed limited though. The ongoing rise in infections and overall risk mood remained the most important driver. Sentiment remained very fragile at the European open. Stocks staged an intraday recovery after hitting losses of about 1.5% and even turned green for a while. But risk appetite dwindled somewhere around noon. WHO’s regional director for Europe Kluge warned the amount of Covid-19 cases is accelerating in 30 countries, 11 of which face a resurgence of the the virus. He urged the continent to prepare for the fall, when the seasonal flu will also kick in. US data later came in mixed with durable and capital goods orders/shipments all beating expectations, but jobless claims again easing less than expected. Another 1.48 mln (1.32 mln expected) Americans filed for jobless claims last week vs. 1.54 mln the week before. Continuing claims remain stubbornly high at 19.52 mln. European stocks eventually trade flat. US indices open with losses. Core bonds gained with the German Bund outperforming. The US yield curve bull flattens with yields declining up to 2.5 bps (30-yr). German yields fall 2.6 (2-yr) to 4.8 bps (30-yr). Contrary to what was the case yesterday, spreads to the core rise across the periphery. Italy (+7 bps) and Greece (+6 bps) underperform.
The dollar remained in the driver’s seat today, pushing EUR/USD further lower. The ECB announced it will introduce a new euro repo-facility (EUREP) with central banks outside the EA as a precautionary liquidity backstop. The press release didn’t really trigger a reaction though. EUR/USD fell from 1.125 and is extensively testing the 1.12 big figure. DXY (trade-weighted dollar) took out 97 yesterday and extends gains today to trade at 97.5 currently. The dollar outperforms against the yen in the search for safe havens. USD/JPY (107.3) surpasses this week’s high but the rise is capped by the 50dMA which also acted as a tough resistance last week. Sterling initially performed well despite the obvious cautious mood. A report that the Bank of England is working with the government on how to increase investment in companies to help them recover from the pandemic might have helped sterling. BoE governor Bailey fears that the combination of debt-laden companies and an estimated £50 billion cash-flow deficit could trigger a solvency crisis. EUR/GBP hit an intraday low at the 0.90 barrier before rebounding towards the 0.904 area currently.
News Headlines
The ECB decided to set up a new backstop facility, called the Eurosystem repo facility (EUREP), to provide precautionary euro repo lines to central banks outside the euro area against adequate collateral, consisting of euro-denominated marketable debt securities issued by euro area central governments and supranationals. EUREP complements the ECB’s bilateral swap and repo lines and will be available until the end of June 2021.
The Turkish central bank unexpectedly waived on a tenth consecutive policy rate cut. It kept the one week repo rate unchanged at 8.25%. The MPC cited an increase in core inflation. Food prices increased due to seasonal factors and the coronacrisis. The Turkish lira felt some minor relief with EUR/TRY sliding below 7.70. Real Turkish interest rates remain deeply negative and play in the disadvantage of the currency.
