Markets
On Monday and Tuesday, sentiment remained risk-on and the reflation trade continued even as the spreading of the corona virus questioned the reopening of the economy. However, this threat was again counterbalanced by (the hope on more) fiscal stimulus. After four days of difficult negotiations, the EU agreed on its €750 bln Next Generation recovery package. At the same time, US Congress and government officials stepped up talks on a new bill to support businesses and consumers as part of the first stimulus package will expire soon. Headlines reporting progress in tests of the corona vaccine were also again an ingredient of the risk-on trade. This risk-on was mainly visible on equity markets and also on FX markets. European equities took a guarded start after the approval of the EU deal, touched intraday gains of up to 2.0% around noon, to close the day with modest gains between 0.5% and 1.0%. US equities showed a mixed picture. The Dow gained 0.6 %. The Nasdaq underperformed (-0.81%). Energy stocks outperformed as the oil price jumped higher (Brent breaking above the $ 44 p/b) as did gold and silver. As was often the case of late, the risk rally had little impact on core bonds. Recent Fed guidance convinced markets that the Fed will keep a very accommodative policy stance. US yields declined 0.3 bp (30-y) to 1.4 bp (5-y). German yields also closed almost unchanged. Peripheral spreads didn’t narrow much further anymore after the EU deal. Non-core bonds had already largely anticipated the EU moving to a co-financing of the EU recovery package.
Significant moves took place on the FX market! Initially, EUR/USD showed a tentative buy-the-rumour, sell-the-fact reaction on the EU deal. The pair dropped to the 1.1425 area, but broad USD selling in US dealings changed the course of events. EUR/USD cleared the 1.1495 2020 top and closed at 1.1527. The trade-weighted dollar (DXY) also dropped decisively below the 95.72 June low. Even USD/JPY joined the USD-decline despite a constructive sentiment, but stays in the established consolidation pattern (close at 106.80). Sterling had a good run on Monday, but showed no clear trend on Tuesday. EUR/GBP closed the session little changed at 0.9054.
This morning, Asian equities are trading mixed with China again outperforming. The Japan July PMI’s (composite 43.9) stayed well below the 50-mark indicating that the economy is still struggling at the start of Q3. The yuan (USD/CNY 6.9725) gains on broad USD weakness. The Aussie dollar stays north of AUD/USD 0.71 (currently 0.7140). Australia June retail sales were solid even as virus invigorated in Victoria. The TW dollar (DXY 95.15 area) struggles to avoid further losses. EUR/USD (1.1535 area) is holding near yesterday’s top levels.
Later today, there are few important EMU or US eco data. Germany (€ 1.5 bln 2038) and the US Treasury ($ 17 bln 20-y bonds) will sell bonds with long maturities. Of late, supply even of long-term bonds mostly had little (negative) impact on the performance of the bond market. German 10-y yield is holding a tight range roughly between -0.50% and -0.40%. The US 10-y yield is almost paralyzed near 0.60%. If anything the trend is tentatively south. The US dollar yesterday broke below key support levels. After giving away the 95.72 support the TW dollar (DXY) is now heading for the 94.65 March low. EUR/USD cleared 1.15 resistance. If confirmed, the break would materially improve the MT EUR/USD picture. However, any further EUR/USD gains probably will have tome come further USD weakness rather than additional euro gains. For EUR/GBP we remain cautious on any sustained sterling gain. The EUR/GBP 0.90 level looks like a solid support. There are no important data in the UK today.
News Headlines
Yesterday, the National Bank of Hungary lowered its base rate as expected by 15 bp to 0.60%. The overnight deposit rate was left unchanged at -0.05%. In its policy statement, the NBH indicated to keep the base rate at a safe distance from the range close to zero. Current level of 0.6% is seen supporting price stability, preserving financial stability and supporting the economic recovery. In addition, the NBH indicated to intend buying limited amounts of government bonds with at least 15 years maturity.
