Markets
Yesterday, global markets had to cope with mixed headlines. European stocks took a hesitant start and sentiment deteriorated further as the US ordered China to close its consulate in Houston, raising the risk of an escalation of the political tensions between the two countries. Remarkably, European equities suffered more from these tensions compared to US indices. The latter soon reversed intraday losses and still closed with gains between 0.24% (Nasdaq) and 0.62% (Dow). US investors are pondering the chances of a new fiscal package, but differences between Democrats and Republicans remain wide. Silver and gold continued their impressive rally. The expectation of global fiscal support and at the same time a prolonged period of ample monetary conditions support ‘scarce’, noninterest bearing assets. Core bonds remained well bid. German bunds outperformed US Treasuries with the curve bull flattening. 2-y German yield declined 1.6 bp. The 30-y eased 3.8 bp. The 10-y German yield is testing the -0.5 pivot. US yields partially reversed an earlier decline. The curve flattened slightly with the 5-y yield rising 1.0 bp but the 30-y still declining 1.6bp. A 20-y $17 bln US bond auction was OK, but not impressive. The dollar stayed under pressure. EUR/USD tested the 1.16 area intraday and closed at 1.1570. The TW dollar (DXY) closed below the 95 barrier, with key support at 94.65 within reach. USD/JPY is an exception to the overall USD downtrend with the pair hovering around the 107 pivot. The initial risk-off propelled EUR/GBP well north of 0.91. Headlines on Brexit still suggest no meaningful progress. However sterling still succeeded a modest comeback to close at EUR/GBP 0.9085.
This morning, Asian equity markets show a mixed picture. Japanese markets are closed. China underperforms as investors ponder the impact of rising US-Sino tensions. USD/CNY returned north of 7.00 despite broader USD weakness. In its fiscal and economic update, Australia estimates a fiscal deficit of 4.3% of GDP for the fiscal year ending June 30. The deficit for the next year is expected to rise to 9.7% of GDP.AUD/USD hovers near 0.7150 on underlying USD weakness. EUR/USD (1.1580 area) is holding within reach of yesterday’s top.
Later today, calendar is moderately interesting with French confidence data, EC consumer confidence and the US weekly jobless claims. The latter has most market moving potential. Will the spreading of the corona virus hamper the recovery of the labour market? Markets expect weekly initial claims to stabilize around 1.3 mln. A negative surprise might support market expectations for the Fed to reaffirm its ultra-supportive stance at next week’s policy meeting. The asymmetrical reaction function of core interest rates hardly rising in case of good news but declining in case of bad news might stay in place. On the FX market the dollar remains in the defensive and there is probably no strong trigger to reverse this trend going into next week’s Fed decision. In the UK, CBI order data will be published and BoE’s Haskel will speak on the economic effect of Covid-19. However, we don’t expect any lasting support for the UK currency. EUR/GBP 0.90 is a solid support. EUR/GBP 0.9176 marks the top of a ST consolidation pattern.
News Headlines
South Korea entered into a technical recession for the first time since 2003. Q2 activity contracted by 3.3% Q/Q after a decline of 1.3% in Q1, according to the Bank of Korea. The Q2 contraction in activity was bigger than expected.
The Italian government approved € 25 bln of extra spending as it tries to limit the impact of the corona virus on the economy. The government will ask parliamentary approval for raising the budget deficit next week and propose the measures early August. According to sources measures will, amongst others, include a conditional extension of financing for temporary layoff schemes.
