Investors kicked of the week on cautious footing. Today’s eco calendar was empty, resulting into technical and sentiment based trading. Overall risk appetite is poor. In some European countries a new phase of lockdown easing kicked in today. However, the prospect of the economy gradually returning to normal was overshadowed by new clusters of corona cases in South Korea and in the city of Wuhan – where the roots of the coronavirus lie. The reports trigger fears of a second wave and with it potentially new and even harsher quarantine measures. There were also some headlines related to the political stalemate between the EU and Germany in the wake of EC president’s von der Leyen threat to sue the country. Chancellor Merkel said a solution to the dispute is possible if the ECB explains itself, which the central bank refuses. This lingering institutional uncertainty could well have been weighing on European assets in particular. A marginal green opening in EMU stocks quickly faded to turn about 1% lower. US markets open slightly lower. Oil futures erased intraday losses of more than 2% after Saudi Arabia announced a unilateral production cut of 1m barrels/day but failed to prop up sentiment. Core bonds trade mixed with UST’s outperforming the Bund despite soaring supply later this week. US yield decline 1 bps at the short end of the curve. The German yield curve bear flattens with yields rising 1.7 bps (30-yr) to 2.5 bps (2-yr). Peripheral spreads to the core rise marginally in Italy (+1 bps) but decline in Spain (-1 bps) and Greece (-4 bps).
The dollar trades strong today. EUR/USD trades near intraday lows of around 1.082 after a decline (from 1.085) during early European dealings. The trade-weighted greenback (DXY) regained the 100 barrier (100.13 at the time of writing) while USD/JPY surged towards a first intermediate resistance at 107.5. Sterling came under quite some selling pressure today. After a failed test of the 0.871 support (200dMA), EUR/GBP shot higher towards 0.88. A soft trading euro prevented a leap beyond however. The pair is currently filling bids in the 0.878 zone. Cable dipped to 1.23 from 1.24 in lockstep with moves in EUR/GBP before recovering slightly to change hands near 1.233.
Saudi Arabia announced that it would further increase its oil production cuts in June. They aim to lower output voluntarily by another 1 million barrels/day to just under 7.5 million, the lowest production since mid-2002. At the height of this year’s supply quarrel, they pumped over 11 million b/d. Brent crude rose from a $30/b to $31/b currently.
Italian industrial production fell by a whopping 28.4% M/M in March (-29.3% WDA Y/Y) as the industry felt the brunt of one of the earliest European lockdown countries. Production of machinery and equipment, important part of export, declined by 39.7% with textile output more than halving.
Czech central bank board member Holub said that the central bank is preparing options for nonstandard policy measures once policy rates (currently 0.25%) hit the technical zero bound. Further reducing the counter-cyclical capital buffer is one possibility. Interestingly, he didn’t rule out negative rates. The Czech Koruna lost ground today with EUR/CZK moving north of 27.50.