Wed, Jun 29, 2022 @ 15:13 GMT
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Global Risk Sentiment Remained Constructive Yesterday

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Global risk sentiment remained constructive yesterday despite the ‘noise’ from developments in Hong Kong and the risk of retaliatory action from the US against China. However, it still wasn’t enough to arrest the stock market rally. Sentiment on European markets improved further as the European commission announcement a proposal for a €750 bn economic support package (named Next Generation EU). The package is embedded in the EU budget and includes € 500 bn to be distributed via grants and an additional € 250 bln loans. EU politicians already raised doubt that an agreement can be reached by the mid-June Summit. An extra Summit will probably be needed early July. Still it should be considered a step in the right direction. The impact on equities and FX was most visible. The reaction on core bond markets was muted. European equites showed gains roughly between 1.5% and 2.5% . US equites also extended their rally with the Dow outperforming (2.21%) and the Nasdaq underperforming (0.77%). The positive risk sentiment and the EU proposal supported the euro and weighed on the dollar. The trade-weighted dollar (DXY) came within reach of the 98.65 support, but a real test didn’t occur yet. The announcement of the EC proposal propelled EUR/USD (temporary) north of 1.10, but a sustained break beyond the 1.1018 correction top failed again. EUR/USD closed at 1.1006. USD/JPY gained modestly (close 107.75), but held within the stablished range. Mainly euro strength propelled EUR/GBP back to the high 0.89 area (close 0.8977). US yields changed only marginally with the 10-y slightly outperforming (-1.5 bps). German yields rose 0.5 bps to 1.5 bps. Intra-EMU spreads continued their narrowing trend with Greece (-9 bp), Portugal (-7) and Italy (-6) outperforming .

Most Asian stock markets join yesterday’s rally in Europe and the US. China and especially Hong Kong underperform after US Secretary of State Pompeo said that Hong Kong can no longer be considered independent from China. The move jeopardizes the region’s special trading status with the US and could spark a backlash from China. US equity futures face are struggling as US President Trump seems to be going after tech companies (see headline). Core bonds aren’t really going anywhere this morning. Today’s eco calendar contains April US durable goods orders (-19.1% M/M), US weekly jobless claims, German inflation figures (0.4% Y/Y) and EMU economic confidence (70.6) (both May). Investors will especially eye weekly claims where the expected 2.1 million could bring the total number since mid-March over 40 million! We must add though that the market reaction to claims was rather subdued the last couple of weeks. The soft German inflation print will add to expectations that a downgrade of growth and inflation forecasts will prompt the ECB next week to increase its Pandemic Emergency Purchase Programme from the current €750bn envelope. General risk sentiment will remain responsible for intraday gyrations on bond markets. Question is whether EUR/USD can build on yesterday’s positive momentum. The test of EUR/USD 1.1018 continues this morning. It was a bit disappointed that EUR/USD didn’t succeed the break on yesterday’s ‘big news’. Even so, we still see room for some further euro gains/USD softness. EUR/USD 1.1163 (30 March top) is the next reference on the technical charts. Euro strength could keep EUR/GBP in the high 0.89 area. A clean break of 0.90 isn’t that evident in a daily perspective and a positive risk environment.

News Headlines

WH officials said president Trump will sign an executive order that will target social media companies’ liability protections. The move comes after Twitter attached a fact checker to one of Trump’s tweets.

South Korea’s central bank cut rates to 0.5%. Apart from Covid-19, governor Lee sees risks from escalating US/Sino tensions. In case of further monetary easing, the central bank will likely use tools other than the policy rate, Lee added.

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