Markets
Markets started the week in outright risk-off modus. Headlines of a jump in new Covid 19 cases from Beijing, over Tokyo and Germany to multiple states in the US, spooked markets this morning. The risk of a second wave of the coronavirus evidently questions investors’ hope on ‘V-shaped-like’ recovery. However, the amount of the losses was different across Asian markets, with South Korea and Japan hit the hardest. European equity markets also opened with losses of between 2 to 3%, but selling gradually eased (currently declines of about 1%). US markets slightly underperform. The impact of the risk-off was also different across markets. German yields show mostly declines between 0.5 bp (2-y) and 2.0 bp (10-y). Treasuries outperform with the curve bull flattening. 2-y US yields decline 1 bp. The 30-y-yield eases 5.5 bp. Still, both 10 and 30-y yields are holding north of key support levels put in place during the protracted April/early June sideways consolidation pattern. The Empire manufacturing survey showed that business conditions in this hard-hit US region recovered more than expected from -48.5 to -0.2. The details were constructive. However, given the headlines on a potential new wave of infections, the impact of the report on global trading remained limited. Interestingly, intra-EMU credit spreads stabilize or even narrow slightly further despite the risk-off. Investors look forward to the EU summit late this week, discussing the options/modalities of a recovery plan for the region’s economy while flexible ECB bond buying is also supportive for peripheral bond markets.
FX markets were also captured by the overall risk-off repositioning. The (trade-weighted) dollar (DXY) tried to extends last week’s rebound. However, the move ran into resistance very soon. The TW dollar failed to break above Friday’s top (97.45 area) and is currently trading little changed in a daily perspective (97.15/20 area). After a disappointing performance of the euro last week, EUR/USD today held a remarkably tight range in the mid 1.12 area. A similar picture was also visible in several other, smaller less liquid currencies (AUD, CAD, NOK, SEK). Initial selling pressure eased rather soon and losses on a daily basis against their reference currencies remain modest. The likes of the zloty and the Czech koruna even slightly outperform in a daily perspective. CNB policy maker Benda indicated that the Czech unconventional easing now has the effect of previous steep rate cuts and fiscal stimulus is still filtering through. Sterling followed a similar intraday trading pattern. EUR/GBP returned temporarily above 0.90 but sterling soon found a better bid. EUR/GBP is currently again trading near 0.8975. For now there is no news yet on the high level talks on Brexit between UK PM Johnson and EU leaders.
News Headlines
Italian PM Conte may tap the European Stability Mechanism (ESM) by the end of July for an amount up to 36 bn euros, Repubblica newspaper reported today, adding that Italy would do so along with other EU members including Spain and Portugal. Finance minister Gualtieri said during an interview over the weekend that the government first wants to finish talks on the EC recovery fund before deciding on ESM credit lines..
The EU for the first time imposed levies on exporters located in a country different than the one which allegedly granted market-distorting subsidies. In this potentially important precedent, import tariffs have been slammed on glass fiber fabrics exported by Egyptian subsidiaries of Chinese companies, saying that the received subsidies unfairly undercut the bloc’s own producers, located a.o. in Finland, Belgium and France.
Germany plans to tap a further 62 bn euros in debt, on top of the 156 bn euros agreed in March to finance the stimulus programmes to counter the blow from the coronavirus, the country’s chief budget lawmaker said.
