European stock markets extended their rally which started last week following the German-Franco endorsement of a €500bn recovery fund. Main indices gain up to 2%. The EuroStoxx 50 broke above the April 30 recovery high and approaches the 50% technical retracement of the mid-February to mid-March sell-off (3085). The European Commission today published its official proposal, labelled Next Generation EU, which entails the €500bn mentioned (via grants) and an additional €250bn (via loans). The money will be raised by temporarily lifting the own resources ceiling to 2% of EU Gross National Income, allowing the EC to use its very strong credit rating. It will be repaid between 2028 and 2058 via the (increased) EU budget and through levies on large businesses, big tech companies and environmental issues. The EC proposal risks triggering reactions from countries like the Netherlands, who dislike grants and by countries who’ll see the relative share of EU funds reduced because of their relatively low COVID-19 impact (eg CEE). EU leaders hope to sign off on a consensus deal at the June 18-19 EU Summit after which it will need to be ratified by EU parliaments. The single currency initially maintained yesterday’s momentum, taking out the 1.10 big figure. However, the move lacked strength and the pair rapidly ran into EUR/USD 1.1018 resistance. The combined context of positive risk sentiment and move towards European solidarity through some sort of joint debt issuance makes the single currency’s performance against the greenback disappointing. The trade-weighted dollar tested the downside of its sideways channel (98.65), but a break didn’t occur. The euro does take the upper hand against other majors like sterling (0.8970) or the yen (118.60). The Japanese cabinet approved another $1.1tn budget (6% of GDP) to counter the recession. PM Abe said that the country now offers more than 40% of GDP in support to the economy, “the largest policy package in the world”. Elsewhere, ECB Lagarde rescaled the ECB’s GDP projections for this year from -5% / -12% to -8% / -12%. She didn’t directly talk about the need to ease policy further in the near term (like ECB Villeroy and Schnabel earlier this week) by raising the Pandemic Emergency Purchase Programme’s envelope from the current €750bn, but the weaker growth (and likely inflation) forecasts could be covert hints. German Bunds underperformed US Treasuries today despite the upcoming US 2-yr FRN and 5-yr Note auctions. It could be because of the possible introduction of a liquid alternative to Bunds as safe haven product (the EC’s EU-backed bonds). The German yield curve bear steepens with yields rising by 0.9 bps (2-yr) to 2.1 bps (30-yr). Peripheral spreads narrow by 8 to 10 bps for Portugal, Italy and Greece. US yield fall by -0.8 bps to 1.8 bps with the belly of the curve outperforming the wings.

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The French INSEE official statics agency expects the French economy to contract 20% in the second quarter of this year (after -5.8% Q/Q in Q1). INSEE estimates that economic activity was running at 21% below normal levels after the lockdown in lifted on May 11. Activity was down 33% in early May. The INSEE consumer confidence indicator weakened further in May.

According to a FT article, China considers to promote the use of domestic coal. It is said consider tightening the import rules. Exports from Australia might be a first victim of this change in policy. The move would be an illustration of growing trade tensions and pollical tensions between the two nations. Recently China already imposed restrictions on the import of Austrian beef.

About 8.4 million UK employees are covered by the state wage subsidy scheme for temporarily laid-off workers, up 400,000 from last week, according Fin Min Sunak. The value of claims for wage subsidies rose to £15 bn on May 24 from £11.1 bn a week earlier. Minister Sunak is examining ways for companies to share part of the cost of the scheme.


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