Markets
The easing of monetary conditions after Friday’s soft US payrolls ran out of steam yesterday. Eco data were few. Equities hovered near recent cycle tops as investors pondered the impact of the G7 tax deal. US and German yields rose by up to 1.5 bps, but this didn’t change the picture after Friday’s decline. Key support levels in yields are within reach. The ongoing environment of low volatility didn’t help the dollar. DXY dropped to the 0.89 area. EUR/USD closed at 1.2190 (from 1.2267 on Friday). EUR/GBP again settled in directionless trading in the 0.86 area. Oil stabilized near the post-corona top (Brent $ 71.50 P/b).
Asian equities mostly trade near unchanged levels this morning with China slightly underperforming. Japan’s Q1 GDP was upwardly revised to a -3.9% Q/Qa from -5.1% Q/Qa initially reported. April Japanese wage data also printed stronger than expected. As usual, their impact on markets was limited. USD/JPY gains a few ticks on an overall tentative USD bid. DXY (90.07) still struggles to hold north of 90.00. The yuan rebounds slightly (USD/CNY 6.393) after last week’s PBOC-guided softening.
The calendar is only modestly interesting today. German ZEW investor confidence is expected to improve further, both for current conditions and for expectations. However, it is far from evident for this report to change the course of events ahead of Thursday’s ECB policy meeting. In the US, the NFIB small business confidence, the trade balance and the JOLTS job openings all address interesting topics on the US economy, but most often their impact on trading is limited. Still, a further rise in job openings might fuel the debate on labor market tightness even as employment is still well below pre-corona levels. The US Treasury starts is monthly refinancing operation with the sale of $58 bn of 3-yr notes. On the technical charts, the US 10-y yield (1.56%) is holding within the sideways range that is guiding trading since mid-March, but support in the 1.55/1.53 area is coming close. The German 10-y yield is also extensively testing -0.20% support. Recent price action suggests markets anticipate the ECB will be reluctant to openly scale back the pace of PEPP bond buying that was put in place for Q2. Still, we assume that the ECB, in one way-or-another, will acknowledge better economic projections (both on growth and inflation), opening the door for some ‘modest implicit tapering’. With markets positioned for a soft ECB, the -0.20%/-0.25% area for the German yield should provide solid support. The picture for the dollar remains hesitant. The damage after Friday’s payrolls (annex decline in US real yield) could have been bigger. At the same time, yesterday’s USD price action remained unconvincing. Thursday’s US CPI combined with ECB policy assessment probably will decide whether the 1.2254/1.2266 resistance will hold as a cap for the euro/floor for the dollar.
News Headlines
Peruvian leftwing presidential candidate Castillo is set to win an extremely tight run-off election against the daughter of jailed former president Fujimori. With 96% of the vote counted, Castillo led Fujimori by 50.3% to 49.7%. Fujimori (trailing 93k votes) is unlikely to tilt the balance in her favor as most of the remaining votes come from rural areas. The Peruvian sol hit a fresh record low at USD/PEN 3.9450 yesterday. The country’s currency has been on the loose ever since Castillo unexpectedly won the first round of the presidential election back in April. In an effort to dampen volatility and stop capital flight, he said that they have not considered nationalization, expropriation, confiscation of savings, exchange controls, price controls or import prohibitions in their economic plan.
The Fed’s overnight reverse repurchase facility drew a record $486.1bn of cash by 46 participants yesterday. Central bank asset purchases, but especially the drawdowns of the US Treasury’s cash account (TGA), unleash a huge amount of USD liquidity in the system. The TGA declined from around $1.5tn by the end of February to $783bn currently as the government spends funds raised earlier for its fiscal stimulus programs…
