European stocks still outperformed in the wake of yesterday’s EC ‘Next Generation’ rescue package proposal for an amount of € 750 bln. However, global investors turned more cautious compared to the euphoria that reigned earlier this week. The risk rally probably couldn’t continue at the same speed as ever more good news is discounted. Uncertainty on the potential US reaction to China imposing a new security law on Hong Kong is another source of caution even as outright escalation is avoided, at least for now. European equity indices gain about 1.0% on average. There were many interesting eco data. German inflation eased from 0.9% Y/Y to 0.6% Y/Y (more or less as expected). European (EC) confidence data showed only a very limited improvement in May. Confidence in the services sector even deteriorated further. However, it did change risk sentiment, still the main driver for most markets. US April durable goods orders showed an second consecutive sharp monthly decline (-17.2% M/M).The decline in the underlying, core series was less than feared. Initial jobless claims (2.1m) were close to expectations but continuing claims showed a surprise decline. (US) equites hardly reacted and opened with modest gains, but the intraday dynamics remain constructive. US yields succeeded a small intraday uptick after the US data, but in a daily perspective US yields are little changed. The very long end slightly underperforms (+2.75 bp). Later today, the US Treasury will sell $38 bln of 7-year Notes. German yields decline between 0.4 bp (30-y) and 1.8 bp (5-y). Intra-EMU spreads against Germany narrowed further, albeit at a slower pace compared to earlier this week. Still, spreads for most countries (periphery and even semi core) decline 3-4 bp.
EUR/USD already tried to break above 1.1018 (previous ST top) after the announcement of the EC economic support package/proposal yesterday. That test was rejected but the subsequent decline was also very limited. Maybe we should label this mornings EUR/USD’s price action as ‘constructive reluctance’. The pair dropped temporarily to the 1.10 area, but gradually took the way north again. The pair is currently again near recent highs (1.1035 area). The trade-weighted dollar (DXY 98.75) is near in the 0.9865/27 support area and drifting lower. USD/JPY is going nowhere (107.75 area) as potential yen strength in the wake of the government’s stimulus package is counterbalanced by the overall risk-on sentiment. Sterling (EUR/GBP 0.8975) is holding a tight sideways range just below the 0.90 resistance. BoE’s Saunders said that it is currently safer to ease policy too much rather than doing too little. However, his remarks have limited lasting impact on sterling. Saunders already voted to raise to amount of asset purchases at previous BoE meeting.
The central bank of Poland (NBP) delivered a surprise 40 bps rate cut. The policy rate now amounts to a record low of 0.1%. It is the third consecutive rate cut after slashing rates twice with 50 bps in March and April to counter economic consequences from the pandemic, introducing also QE for the first time. The Polish zloty erased earlier modest gains today, trading at 4.43 to the euro.
The US administration plans to cancel the visas of Chinese students and researchers in the US who have ties to China’s military schools. Although those plans were already under consideration before US/Sino tensions soared over Hong Kong, it is likely to further add fuel to the fire.