Markets
European equities convincingly reversed the disappointment after Friday’s unexpected sharp setback in the EMU August PMI’s. The second wave of the corona pandemic threatens slowing the restart of the European economy, in particular in the services sector. However, equity investors again see the glass half full. Headlines on optimism about a new treatments for Covid-19 patients in the US (FDA approval of the use of plasma) and on a potential accelerated US approval of a corona vaccine supported optimism. US-China tensions also moved a bit to the background. A rising oil price (Brent at $44.80 p/b) additionally illustrated the broad risk-on. Eco data were few and had little impact on global trading. European equites are gaining up to 2%+. US equities extend their recent gradual, but protracted uptrend, improving up to 1%, with S&P and Nasdaq touching new record levels. As was often the case of late, the global risk-on had far less impact on bonds compared to solid equity gains. The headlines that are supporting optimism on the equity markets don’t change prospects/expectations on the global monetary policy stance. At the same time, any remarks of Chair Powell on the Fed’s future policy framework at the Jackson Hole symposium will probably reinforce the bank’s commitment to reach a symmetric inflation target, suggesting that policy should stay accommodative for longer. In this context, bond investors don’t have a strong incentive to anticipate substantially higher yields right now. Changes in US yields are less than one bp. German bonds marginally underperform, ‘rising’ up to 1.3 bps (30-y). The positive risk environment also causes a limited tightening in 10-y intra-EMU spreads versus Germany (Greece -2 bps; Italy -1bp). In a broader perspective, intra-EMU spreads found a new equilibrium as the ‘integrated’ framework of monetary and fiscal support is largely discounted.
Poor EMU PMI’s combined with US data and equity outperformance caused EUR/USD profit taking last Friday with the pair drifting further away from the 1.19+ peak touched early last week. However, the pair showed resilience today. EUR/USD rebounded back above the 1.18 barrier; a solid performance amid the broader risk-on context (currently 1.1840 area). That said, there is no indication for the pair to leave the 1.17/1.1950 consolidation pattern anytime soon. USD/JPY remains locked in a very tight range in the upper part of the 105 big figure (105.80 area). This analysis today also applied to the EUR/GBP cross rate. Sterling temporary strengthened below the EUR/GBP 0.90 handle at the end of last week, both on euro softness and on some better UK eco data. However, the lack of progress in the Brexit talks remains a too high hurdle. EUR/GBP returned to well-known territory (0.9030 area)
News Headlines
France is keeping its 2020 growth forecast at -11%, finance minister Le Maire said today. Le Maire cited a slew of uncertainties, from the coronavirus, over Brexit to the US elections, that will keep a lid on the economy even though “there was a good recovery in May and June”. He added that his 100 bn euro stimulus package will be postponed until next week to hammer out the final details..
Finnish authorities announced tightening restrictions on public gatherings from September onwards, limiting them to 50 people unless measures are in place due to a recent rise in Covid-19 cases. In August, public meetings of up to 500 people were allowed.
Foreign visitors occupying Spanish hotels rose to 1.1 million in July after the country abandoned most of Europe’s strictest coronavirus lockdowns in late June. That’s up from about 115 000 the previous month but still well below July 2019’s 6.45 million. Overnight stays in the first seven months of the year has fallen more than 70%, the data showed.
