Markets
Earlier this week, sentiment on risk turned a bit more cautious but before yesterday global equites held up rather well as investors pondered the latest developments in the spreading of the coronavirus. However, yesterday’s unexpected rise in US jobless claims apparently was a game-changer, at least short term, as it might be an indication that the rise in US infections could complicate the reopening of the economy. US equites yesterday closed with substantial losses. Uncertainty on the timing and the content of an additional US fiscal package and rising political tension between the US and China accelerated the risk-off correction in Asia and Europe this morning. European equity indices recorded losses of 2% + soon after the start of trading. The preliminary EMU July PMI’s were much better than expected, indicating a solid recovery at the start of Q3. The EMU composite index jumped from 48.5 to 54.8, beating market expectations by a big margin. In particular activity in the services (55.1) sector rebounded more than expected, but also manufacturing activity printed above the 50 boom-or-bust level. German and French PMI’s also printed stronger than expected, with a big positive surprise for France. However, markets weren’t impressed, probably as the IHS Markit comment on the PMI’s warned for the risk of insufficient demand and an ongoing decline in employment. Markets probably also fear that today’s positive surprise might be reversed if the spreading of the corona virus regains momentum. European equites have left the intraday bottom, but are still showing losses mostly between 1.5%/2.0%. US equites also opened in red with the Nasdaq underperforming (-1.5%). Rising US-China tensions remain a cause of investor caution.
Initially, the reaction on the (European) interest rate markets after the PMI’s was also modest, but gradually core bonds met some selling pressure/profit taking. German yields are rising between 1.5 bp (2-y) and 4 bp (10-y). The rise in US yields is more modest, with shorter maturities little changed but the 30-y rising 2.5 bp, correcting a small part of yesterday’s sharp decline. Interesting, non-core EMU bonds still showed resilience. There was no meaningful spread widening despite the risk-off.
On the currency markets, the dollar remains under pressure. There was no outspoken reaction of EUR/USD after the stronger than expected EMU PMI’s. At the same time, the dollar again failed to profit from the broader risk-off sentiment. EUR/USD hovered in a tight range near the 1.16 big figure and is again nearing yesterday’s correction top in the 1.1627 area. The trade-weighted dollar (DXY) is extensively testing the key 94.65 support. A weekly close below this level would be highly significant from a technical point of view. USD/JPY also broke out of recent very tight ST consolidation pattern and is nearing the 105.99 support. Gold jumped above $1900 p/oz, with the 2011 all-time top within reach.
In line with the EMU, UK PMI’s were also much stronger than expected (composite 57.1; services 56.6; manufacturing 53.6). June UK retail sales also rebounded sharply (13.9% M/M vs 8.3% expected). As was the case for the euro, the data had only limited impact on the UK currency. EUR/GBP hovered near the 0.91 pivot.
News Headlines
The Central Bank of Russia cut its benchmark intertest rate by 25 bp to 4.25%. Expectations among analysts diverged, but a 50 bp rate cut was seen as an another option. However, the bank left the door open for a further rate reduction if the situation develops according to its baseline scenario. The ruble lost further ground after the rate decision with USD/RUB trading just below 72.00.
The Markit US PMI rebounded in June but contrary to Europe slightly missed expectations with the manufacturing index rising to 51.3 and the services sector printing at 49.6.
