Markets
Global markets tried to find their composure yesterday after Wednesday’s risk‐off repositioning. A sharp rise in corona infections, especially in the US, questions the reopening of the economy, but this is counterbalanced by extremely supportive monetary and fiscal conditions (and the hope for even more support). European equities opened in red, but soon returned north. US data were mixed. US May durable orders (+15.8% M/M) and shipments (1.8%) were stronger than expected, but weekly jobless claims (1.48 mln) declined less than expected, illustrating a fragile state of the labour market. US equities initially traded lackluster, but a late session rally resulted in gains of about 1% for the major indices. Bank stocks outperformed after regulators eased the rules on trading and investment portfolios. Yields changes in US Treasuries were limited, varying between ‐1.4 bps (5y) and + 0.7 bps (10y). The $41bn 7‐yr Note auction was well accepted and printed at a record low yield of 0.511%. The German yield curve bull flattened despite the equity rebound with yields declining between 1.8 bps (2y) and 4.3 bps (30y). The ECB in the June Minutes provided an indirect response to the German court ruling, explaining that the ECB judged that the APP was the best way to revive the economy and inflation. The central bank also 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 prospect for this issue to be solved had little impact on markets. Peripheral spreads even widened a few bps (Italy +7bps). The dollar remained in the driver’s seat and the euro this time hardly profited from the intraday improved in global risk sentiment. EUR/USD closed at 1.1218 (from 1.1251). Sterling was in better shape. EUR/GBP temporary dropped to the 0.90 area, but closed at 0.9033.
Asian equities join WS gains this morning even as uncertainty on a second corona outbreak persists. Most regional indices show gains of about 1%. Even so, US yields are still declining marginally. The dollar is trading stable (DXY 97.30 area; USD/JPY 107.05, EUR/USD 1.1220). The Aussie dollar is holding relatively strong at AUD/USD 0.6890.
The eco calendar is moderately interesting today. EMU M3 money supply is probably no market mover. US May spending and income data and the price deflators are scheduled for release. Price deflators are expected to ease further (Core PCE expected at 0.9 Y/Y). We don’t expect a big market reaction, but soft price data might further support the constructive sentiment on core bond markets. US yields are drifting further south in their sideways range. We expect the positive bid for core bonds to persist, unless the equity really accelerates, which isn’t that evident given the uncertainty on the new corona wave. The German 10‐y yield is near first intermediate support in the ‐0.47% area. The EUR/USD rally took a breather after a strong performance in May/early June. This week’s performance might even be considered as slightly disappointing. Still we expect the 1.1160 support the hold. The EUR/GBP rally shows tentative signs of topping, but we don’t expect a sustained comeback of sterling soon.
News Headlines
The US Federal Reserve released results of stress tests for 2020 and additional sensitivity analyses conducted in light of the corovnairus event. In aggregate, loan losses for the 34 banks ranged from $560bn to $700bn and aggregate capital ratios declined from 12.0% in Q4 2019 to between 9.5% and 7.7% under the hypothetical downside scenarios. The Fed therefore decided to cap dividend payments and suspend share repurchases for large banks in Q3 2020 in order to preserve capital. Banks should also re‐evaluate longer‐term capital plans.
Texas governor Abbott halted the reopening of the Lone Star State’s economy. He suspended elective surgeries in the state’s largest cities to free up hospital space. Houston also warned that it couldn’t hire or retain enough contact tracers to keep up. North Carolina, Louisiana and Kansas also paused plans to loosen restrictions this week. The US set another one‐day record increase in coronacases of nearly 42 000 infections yesterday.
