UK Spring Bank Holiday and US Memorial Day reduced traded volumes to scratch today. European stock markets put aside recent Asian worries about China’s grip on Hong Kong. They gain 1% to 2%, but fail to inspire other markets. The trade-weighted dollar approached the psychologic 100 mark, but failed to hold on to early gains. The mirror image in EUR/USD is a brief stance around 1.0875, before returning to 1.09. EUR/USD is trapped between roughly 1.08 and 1.10 since early April. Sterling (EUR/GBP) changes hands around 0.8950. Political pressure is building on UK PM Johnson to sack chief advisor Cummings for breaking UK lockdown rules. Core bonds tread water near opening levels. German yields lose less than 1 bp across the curve. The sole economic print of any importance was the May German IFO Business Climate indictor. It rebounded as expected, from an all-time low of 74.2 to 79.5, which remains below the 2009 low (79.9). Forward looking expectations triggered the move. The sub indicator now slightly exceeds the dip from the great financial crisis (80.1 vs 79.2). Current conditions drifted further south. The IFO-release didn’t bother investors who received similar information from last Thursday’s May PMI’s.

The US Treasury’s end-of-month refinancing operation is one of the eyecatchers this week. The Treasury sells 2-yr ($44bn), 5-yr ($45bn) and 7-yr ($38bn) Notes. Throughout Q2, the US Treasury is gradually upping the auction sizes because of the increased financing needs created by the COVID-19 outbreak. Total anticipated amounts on offer (excluding bills) will be $52bn higher in the month of July ($276bn) compared to April ($224bn). So far, the additional supply (focused on the long end of the US curve) only caused a modest steepening at the long end of the curve with investors easily digesting supply. Other items worth watching are virtual discussions by ECB’s Lagarde (Wednesday) and Fed Powell (Friday). Fed Chair Powell clearly ruled out turning to negative policy rates even if the Fed Funds Future curve discounts such action during 2021. The Fed is nevertheless ready to increase existing measures (asset purchases, forward guidance, liquidity tools) if necessary. The ECB’s position will be scrutinized in the run-up to the June 4 policy meeting. First estimates by the central bank put the economic damage for this year in a wide range between 5% and 12%. As lockdown weeks passed by, the ECB’s ‘mild’ scenario can be labeled an optimistic one. IHS Markit puts the estimated blow at 9% after May PMI releases. Several market participants expect the ECB to increase the size of its €750bn Pandemic Emergency Purchase Programme. Seven weeks into PEPP, the central bank already spent 25% of its envelope (€181bn). The further deteriorating growth and inflation (unlikely to be above 1% this year) would be the rationale for frontrunning to add stimulus. A final element to look out for is the European Commission’s proposal for a recovery fund (Wednesday). Details are known, but the proposal lacks consensus between EU countries as shown by 4 countries’ (AT, NL, DK, SW) counterproposal over the weekend (loans instead of grants).

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News Headlines

Representatives from the Chinese steel sector advocate an increase in domestic iron ore production and investment in foreign production to ensure supply over time. The representative body of the steel industry wants China to set a ‘national strategic goal’ of keeping domestic iron ore output at 20% of domestic demand. The industry asks for fiscal incentives to invest in domestic mines/production.

The head of the International Energy Agency, Fatih Birol in an interview said that global oil consumption maybe hasn’t peaked yet. In the absence of strong government policies he expects ‘a sustained economic recovery and low oil prices are likely to take global oil demand back to where it was and beyond’. The post-corona oil demand pattern will be important for meeting the Paris climate agreement. Birol says that governments will have to use the economic recovery packages to support green energy in order to help to reaching these goals.


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