Markets
Global sentiment was again mainly driven by the developing store on the coronavirus. Investors still balance the risk of economic damage with the measures politicians and central bankers are taking to mitigate the impact. This morning’s announcement of the Chinese government to reduce tariffs the imports of some US goods was a result of the trade agreement between the two countries. However, given the timing, markets only could see it as part of a broader policy response to limit the impact of the coronavirus. Equities again profit most. Some European equity indices including the STOXX Europe 600 and the DAX are setting new all-time records or are coming very close. The major US equity indices are also testing the all-time highs at the open. For now, the prospect of ample (monetary, fiscal and other) policy support to contain risk is apparently more important than indecisive hard data (especially in Europe). There was again no close link between the equity performance on the one hand and the price movements in bonds and FX. Core US and European yields tried a shy attempt to extend recent rise, but the move had no strong legs. Daily yield changes across the US yield curve are about 1 bp, with the 30-y slightly outperforming. German yields are only marginally changed, too. For now there is no clear bond market reaction to the political turmoil in Germany. 10-y intra-EMU spreads versus Germany show a mixed picture with Greece still outperforming(-4 bps) and Italy underperforming (+3bp). France sold € 9 bln of long (10-y) and ultra-long bonds (15, 20, and 50-y maturity). Investors interest was a bit mixed with a better bid-cover for the 10-y, but less buying interest than at previous auction for the longer maturities. Lower absolute yield levels probably were a factor of significance, too. Spain also sold € 4.4 bln of bonds across different maturities.
The risk-rebound this time again had limited impact on trading in the major (USD) cross rates. The trade-weighted dollar (DXY) preserved this week’s gain, but basically held a sideways intraday trading pattern (98.30) area. USD/JPY is locked in a tight range close to but slightly below the 110 barrier. EUR/USD struggles just north of the 1.0981/89 support. Poor German order data and political uncertainty in Europe’s largest economy don’t help the euro. However, investors probably await tomorrow’s US payrolls to decide on a break beyond a key technical level.
The EUR/GBP cross rate drifted cautiously higher in technical trade. There were no important UK data. The lack of new (recently mainly positive) UK eco news and lingering uncertainty on the EU’s approach toward financial regulation in the upcoming EU-UK trade talks are preventing further sterling gains. Even so, EUR/GBP is holding below 0.85. Cable (1.2965) suffers from ongoing USD strength.
News Headlines
Germany’s Thomas Kemmerich said he will step down just one day after his liberal FDP and the CDU voted him as state prime minister of Thuringia with the support of the far-right AfD. The unprecedented alliance broke with convention not to govern with extremist parties and triggered political outrage across the country. CDU Chancellor Merkel called the move of her party unforgivable and said it should be reversed.
The Czech National Bank unexpectedly hiked interest rates from 2% to 2.25% in a tight 4-3 vote. Its new forecasts assume slightly slower growth in 2020 (2.3% vs. 2.4%) but left 2021 unchanged (2.8%). Inflation estimates have been upgraded to 2.3% (from 2.1%) for Q2021 and 2.1% (from 1.9%) for Q2 due to increasing domestic price pressures and are the CNB’s main reason for raising rates today.
