Same trading theme, different day. A violent sell-off on US stock exchanges yesterday reverberated through the Asian session and also during early European dealings. European equities gapped lower after which losses mounted to 3% before bouncing off the lows. Most indices even pared all earlier losses even as new countries (Greece and possibly Poland) disclosed the first corona cases. Has sufficient corona-driven bad news been discounted? Whatever the underlying reason, it also applied to core bonds. Both US Treasures and the German Bund recovered from intraday lows with the latter underperforming amid reports from Germany’s Scholz. The finance minister said he’s planning a temporary suspension of the debt brake which constitutionally limits the structural deficit Germany is allowed to have, in essence paving the way for fiscal stimulus. Irish central bank governor Makhlouf’s comments (“no need for ECB to rush to action”) might also have weighed on the Bund. The US yield curve is more or less unchanged with the exception of the 30y (+1.5 bps). The German yield curve bear steepens with yields flat at the short end of the curve and advancing up to 4 bps at longer tenors (30-yr). Spreads vs. the 10y yield widen. Greece (+12 bps) is again today’s laggard after having identified a first corona case. EUR/USD held up well today. The currency pair even eked out marginal gains initially as (US) yields further declined (weighing on the dollar). However, the core bond yield turnaround capped and even reversed the cautious uptrend. EUR/USD is currently trading virtually unchanged at 1.087. The Japanese yen took a breather after a strong two-day session. USD/JPY is currently changing hands in the 110.50 area.

Yesterday’s rather decent sterling performance given the negative risk climate and the prospect of difficult trade talks starting next week, was rather surprising. The pound erased those gains completely today however. While that makes sense in today’s still fragile risk context, it’s probably related to the UK Chancellor’s pending decision to delay some of the government’s key decisions on tax and spending until the autumn (see headline below). EUR/GBP rose beyond 0.84 but the still in dire shape euro prevented the gains to last completely. The pair is trading close but below 0.84, up from 0.836 this morning. Cable is filling bids in the 1.293 area, down from 1.30.

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News Headlines

South Africa’s Finance Minister Mboweni announced measures to curb the country’s budget deficit, including measure to limit the public wage bill. Still, the budget deficit is expected to rise to 6.8% of GDP in the fiscal year through April 2021. Minister Mboweni hopes the measure will be enough for the country to keep its investment grade rating with rating agency Moody’s. However, the measures probably will face hefty headwinds from trade unions. The rand reversed initial (risk-off driven) losses against the euro. EUR/ZAR declined from the 16.70 area to the 16.45 area.

In an address before Parliament, Former UK Finance Minister Javid asked the government to stick to the fiscal rules.  ‘At a time when we need to do much more to level up across generations, it would not be right to pass the bill for our day-to-day consumption, to our children and grandchildren’ he was quoted. This morning, the FT reported that the new Finance Minister Sunak was considering to delay some of the governments decisions on the budget till the autumn as the downgrade of the growth forecast and the outbreak of corona caused a difficult environment for the budget.


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