Market movers today

We get the German ZEW indicator today. Expectations showed a strong bounce back in April and it will be interesting to see if the upbeat mood continues and whether it will begin to reflect in current economic conditions.

We will monitor the gradual opening of economies across the world and potential escalation of US-China tensions. Pressure is mounting on China, as US, EU and Australian officials are calling for a WHO investigation into China’s handling of the virus. China has agreed to this.

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Fed Chair Powell’s hearing before the US Senate Banking Committee takes place this afternoon. His prepared remarks were released yesterday and did not contain any surprises. The Fed remains ‘committed to using our full range of tools to support the economy’ and ‘we expect to maintain interest rates at this level until we are confident that the economy has weathered recent events’. We expect Powell to repeat that negative policy rate is not in the cards right now.

Selected market news

After a relatively uneventful day yesterday news broke that Germany and France have come with a common proposal for the EU recovery fund. There is a strong political signal for solidarity in the design of the recovery fund. We are positively surprised on the details of the recovery fund compared to expected – but we have to highlight that it is not a done deal yet. Sebastian Kurz, the Austrian Chancellor, tweeted that the Northern European countries’ position remains unchanged. The (temporary) recovery fund, which is set at EUR500bn, is expected to issue long term (at least 2028 maturities) and focus primarily on grants (EU contributions raised from 2028, so the value of the grants is unknown). The timing of the supply is unknown but we expect after summer at the earliest (recovery fund could be approved on 18-19 June, if rest of the EU approves).

Yesterday the S&P 500 index rose the most in six weeks (3.15%) and is now back to the level in early March supported by news that Moderna Inc. has said it is closer to a COVID-19 vaccine. Asian stocks are also up this morning. In general, risk has been supported by easy economic policies, numbers of new COVID-19 infections moving in the right direction and many countries about to or have already started a gradual re-opening of the economies despite ‘old risks’ like US-China tech war and Brexit re-emerging. Oil prices are also moving slightly higher.

US President Trump has said that ‘if the WHO does not commit to major substantive improvements within the next 30 days, I will make my temporary freeze of US funding to the WHO permanent and reconsider our membership’.

In the UK, Bank of England’s Silvana Tenreyro said that negative rates in the euro area ‘have had a positive effect in the sense of having a fairly powerful transmission to real activity’ adding fuel to the speculations that BoE may cut its Bank Rate below zero too (currently 0.1%).

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