Markets
Global trading was captured in a lackluster, defensive trading dynamics yesterday. Investors saw growing risks that the spreading of corona might arrest the reopening of the economy even as eco data referring to the recent past printed mostly positive. Still markets fear that they were mainly backward looking rather than forward looking. European equities closed with a small loss.US consumer confidence (conference Board) declined more than expected (92.6 from 98.3), with expectations deteriorating. At the start of its two-day policy meeting, the Fed extended 7 emergency lending programs to Dec 31. It had little impact on sentiment. A late session decline caused US indices to close with substantial losses. (S&P -0.65%, Nasdaq -1.27%). After an up-tick Monday, the US yield curve resumed its bull flattening trend. 2-y yields declined 1.3bp. The 30-y yield lost 4.3 bp. A 7-year auction attracted solid investor interest. The US 10-y real yield is testing the all-time low levels near -0.93%!, indicating that the market is preparing for going financial compression as they look forward to today’s Fed decision. The stalemate in the negotiations on a new US economic stimulus package is pressuring US yields, too. German yields declined about 2 bp. On the FX market, the dollar decline took a breather, but there was no meaningful USD rebound. EUR/USD finished the day at 1.1716. The TW dollar (DXY) ended the session near 93.70. USD/JPY was a slight exception to the rule as the pair declined further to close at 105.09. Sterling rebounded with EUR/GBP closing at 0.9060.
This morning, Asian equites are trading mixed with China outperforming and Japan underperforming, as investors look forward to the Fed policy decision. USD/CNY is holding near the 7.00 pivot. EUR/USD is holding well north of 1.17 (currency 1.1730). USD/JPY remains under moderate pressure and is testing the 105 level.
Later today, there are only second tier data in the Europe. Germany will sell €3.5 bln of 2035 government bonds. In the US, the US goods trade balance deficit is expected to stabilize near a high $ 75 bln in June. However, even a substantial data surprise probably won’t move markets just hours before the Fed policy announcement. The Fed is largely expected keep the target range for the Fed fund rate at 0.0% to 0.25%. After taking measures to restore market functioning and to provide emergence support to the economy, the next step for the Fed is to give the market a framework for its policy support going forward. That can come in September when the Fed has new economic projections available. Even so, Powell will probably acknowledge the risk of the flare up of the corona virus weighing on the economy and commit further support as necessary. The Fed message will be dovish, but will it be strong enough to push US yields (and especially real yields) even further down.? The 0.54% area for the 10-y is a solid/key support. A break would be highly significant from a technical point of view. The decline in US real yields was also an important driver behind recent decline of the USD dollar (and behind the rise in the likes of gold). As we don’t expect a sustained reversal of this trend in real (US) yields, the dollar will probably stay in the defensive. EUR/USD 1.1822 (62% retracement since Feb 2018 top) is the next important reference on the charts. Also keep a closer eye at the USD/JPY price action. The yen apparently is regaining some of its safe haven status and USD/JPY might take the lead in a next USD downleg. More uncertainty on the US fiscal package might weigh on the USD, too. In the UK, the June monetary data will be published. We expect more EUR/GBP technical trading near the 0.91 pivot.
News Headlines
Rating agency Fitch lowered the outlook on its Japan credit rating from stable to negative. The agency mentioned the sharp economic contraction due to the corona virus and the rising public debt. Fitch expects the economy to contract 5.0% this year. The rating agency maintained its ‘A’ rating for the country.
Inflation in Australia declined sharply in the second quarter by1.9% Q/Q to be down -0.3% Y/Y. However, the decline was triggered by some exceptional factors including a sharp decline in Energy prices and prices of childcare . Trimmed mean inflation eased a more moderate -0.1% Q/Q to come out at 1.2% Y/Y.
