Markets
Yesterday, global investor sentiment took a turn for the worse as trading developed. European equities opened with decent gains, but optimism soon met a series of negative headlines. EU-UK negotiations on a post-Brexit deal ended in a complete stalemate. In the US, there was a lot of uncertainty on the timing and the content of a new fiscal support package. Last but not least, US initial weekly jobless claims rose from 1.3 mln to .1.412 mln, the first rise since end March. The report is a high profile warning that the US economic recovery might be stalling as the number of corona infections continues to rise. European equities reversed earlier gains. After a mixed open, US indices finally succumbed to the negative headlines. The S&P closed 1.2% lower. The Nasdaq lost 2.3%. The US yield curve again showed an impressive bull flattening. The 2-y yield was little changed (+0.2 bp) but the 30-y declined 6.2 bp! German yields were little changed, even marginally higher (+1.9 bp for 5-y). Remarkably, intra-EMU peripheral government bond spreads versus German resumed their tightening trend, despite the risk-off sentiment. Very interesting price action also again occurred on the FX markets. The dollar again failed to profit from the deterioration in global sentiment. A brief USD-uptick early in US dealings was soon reversed. EUR/USD even set a new ST correction top well north of 1.16 (close 1.1595). The TW dollar (DXY) tested the key 94.65 support. Even USD/JPY, which largely decoupled from the broader USD trend of late, turned south (close 106.86). Negative headlines on the US economy and the sharp decline in LT US yields are becoming USD negatives. Sterling lost modest further ground against the euro. However, the damage could have been bigger as the latest round of negotiations between the EU and the UK ended in a complete stalemate, with both sides pondering consequences of a no-deal outcome. EUR/GBP closed at 0.9102.
This morning, Asian markets join the risk-off correction on WS yesterday. Aside from an uncertain global/US eco context, US-China political tensions are intensifying. Yesterday evening, US Secretary of State Pompeo gave a very combative speech on the Chinese regime. This morning, China ordered the US to close its Consulate in Chengdu, a retaliation for the close of China’s Consulate in Houston. Asian equites mostly are losing about 1%. Chinese markets underperform (loss up to 3.0%). US futures also turn south again. The dollar remains in the defensive. EUR/USD hovers near 1.16. USD/JPY declines further (106. 45 area, but Japanese markets are closed). The yuan declines despite overall USD weakness (USD/CNY 7.02).
Later today, global sentiment will remain an important driver for trading, with the focus on the US-China political tensions and the political bickering on a new US fiscal support package still in play. Regarding the data, the preliminary EMU and US PMI’s will take center stage. The EMU PMI’s (Manufacturing, services and composite) are all expected to return above the 50 mark, confirming a gradual economic recovery and this is also expected for the US. In current environment, with the virus still spreading in the US, but with also risk for a second wave outside the US, we assume markets to be more sensitive to a negative surprise that to a positive one. US LT yields are on a downward trajectory, with the 10-y yield near the 0.54% range bottom. The trade-weighted dollar is testing the key 94.65 support. A break (weekly close below) would be highly significant from a technical point of view. We don’t fight the USD downtrend going into next week’s Fed meeting as markets assume Powell and Co to bring a soft message. In the UK PMI’s and June retail sales will be published. We see little upside for the UK currency against the euro in an overall risk-off context, even in case of decent UK eco data.
News Headlines
Yesterday, the South African central bank cut is policy rate for the fifth time this year. The Bank cut the main lending rate by 25 bp to a record low 3.5%. However the vote was not unanimous. Two members voted to leave to interest rates unchanged. The bank lowered its 2020 growth forecast to a contraction of -7.3%.
