Markets took a breather after yesterday’s impressive risk-on rally. European equities couldn’t maintain opening gains but the correction remained modest. President Trump threatening to freeze the US WTO financing and pockets of trade tensions between China on the one hand and Australia and the US on the other hand, created some noise but didn’t change sentiment in a profound way. German ZEW investor sentiment (expectations component) improved more than expected to 51.0 (from 28.2, 30 expected), but the current conditions assessment declined to the lowest level since 2003. The direct impact on the release of European/global trading was limited. Even so, European equites gradually bottomed. Sentiment on European markets improved after Germany and France launched a proposal yesterday for an EU rescue fund that might support hard hit regions and sectors via the EU budget. The EU nations still have to agree on a deal and that won’t be easy, but markets see chances growing for an anti-crisis policy at an EU level. This eased a negative factor that has weighed on Europe assets of late. Intra-EMU spreads versus Germany narrowed further. Yesterday Italy outperformed. The 10-y Italian spread declined another 5 bp today. Spain and Portugal (-9 bp) succeeded a catching up move. Greece also narrowed 14bp. The pause in the equity market also slowed the rise in core bond yields. German yield changes are about 1 bp or less. US yields decline 1-2 bp with the 30-y underperforming (+0.5 bp). After finishing this report Fed Chair Powell and US Treasury Secretary Mnuchin will testify before a US Senate Committee. The text of Powell statement was already available yesterday. The Powell reiterated the Fed’s aim to support the economy. Markets now look out for an new sights from the Q&A session.

EUR/USD was supported both by a broader risk-on decline of the US dollar. At the same time, the euro profited from the announcement of the German-Franco rescue fund initiative. Today, the positive euro bias to some extent persisted, even as the euro momentum eased this afternoon. EUR/USD met offers in the 1.0975 area, but a test of the 1.1000/18 resistance was still one step too far (currently 1.0940 area). The yen weakened further (nearing 108 to the dollar area). This move wasn’t driven by global risk sentiment but by the BoJ announcing an emergency policy meeting next Friday (cf infra). Sterling shows a mixed picture, gaining modestly against the dollar, but EUR/GBP (0.8950 area) maintains most of recent gains due to a better euro bid. The UK this morning announced a new general import tariff scheme that will be applied from January next year for countries that won’t have a trade agreement with the UK at the time. Regarding the UK eco data, UK jobless claims soared 857K. The jump in claims could have much bigger as several millions of UK employees are supported by a UK government program paying for temporary unemployment.

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The Bank of Japan will hold an unscheduled monetary policy meeting on Friday. The purpose of the emergency gathering is to discuss the parameters of a possible new measure aimed at (indirectly) providing funds to small(er) companies in need. Other key monetary variables probably won’t be altered after last month’s meeting during which the BoJ ramped up its QE programme..

The European Commission will present its own recovery fund idea next week but it won’t be just a copy of the Franco-German proposal, its spokesman said today. While the latter offers only grants to EU member states hit hardest by the pandemic, the EC will go for a balance of grants and loans.

In an interview with Fox, US White House advisor Kudlow said president Trump wants to see payroll taxes cut by 7.6%. Trump repeatedly said that any new stimulus deal would have to include payroll tax cuts.


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