Trading was again a bit diffuse/inconsistent across markets at the first session of the new quarter. (European) data aren’t the most timely drivers for price action. Even so, EMU manufacturing PMI (47.4) was upwardly revised and so were the measures of France and Germany. Other German data also printed stronger than expected. Especially retail sales beat the consensus by a wide margin. Sales rose 13.2% M/M in May and even were up compared to the same period last year (3.8%!). German unemployment rose less than expected/feared (+69 000) raising the official unemployment rate from 6.3% to 6.4%. Better eco data probably were only part of the driver for bond trading, but core bonds started the new quarter in the defensive. The supportive bid at the end of the quarter evidently disappeared. A poor 30-y UK Gilt auction (low bid cover of 1.68) illustrated mediocre investor interest for bonds with long maturities at current low levels. A further (volatile) rise in the oil price maybe also supported the rise in yields. The German yield curve bear steepens with yields rising between 2.6bp (2-y) and 5.5bp (30-y). Treasuries outperform German bunds, but the US yield curve shows a similar steepening trend (2-y +0.5 bp, 30-y +4.5 bp). With 2.369 mln new jobs in the private sector, the ADP report missed market expectations. However, an unprecedented revision of the May number (+ 3.065 mln reported earlier as a decline of 2.76 mln) illustrates the high degree of statistical issues with current data series. The US Manufacturing ISM beat expectations (52.6 vs. 49.8) as new orders and production surged. Later today, the Minutes from the June Fed meeting still have market moving potential. On the intra-EMU bond markets, peripheral spreads (10-y) narrowed further (Greece -9 bp; Italy -5bp). In syndicated 15-year bond sale Portugal sold € 4 bln of bonds. Orders were reported at a record € 41 bln.

The rise in core yields initially didn’t match risk-on sentiment on other markets. European markets couldn’t capitalize on yesterday’s strong WS close and gradually turned south. Selling eased early in US dealings on headlines of good results from tests of a potential new corona vaccine. European equities almost returned to unchanged levels (after losses of 1.5%+ earlier). US equites even show gains of 0.5%.

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Global currency trading took its clues from global equity trading/risk sentiment. EUR/USD struggled not to fall below the 1.12 handle, but again no sustained break occurred. The pair rebounded to the 1.1225 area, little changed from opening levels. After a strong performance of the previous days, the risk-off weighed on USD/JPY. USD/JPY dropped to the 107.40 area after trading north of 108 this morning (currently 107.60). Sterling initially continued yesterday’s technical rebound. EUR/GBP dropped to 0.920 area, but found a bottom as global sentiment turned more mixed (currently 0.9040 area). The final manufacturing PMI was confirmed at 50.1.

News Headlines

To avoid an unnecessarily prolonged and deep decline in the economy and inflation, the Swedish Riksbank decided to extend its asset purchase programme from SEK 300bn to SEK 500bn. Purchases will last up to the end of June 2021. In September, the Riksbank will also begin purchasing corporate bonds. The Executive Board has further decided to cut interest rates and extend maturities on lending to banks. The repo rate is held unchanged at 0%, but can be cut in the future if it is assessed to be an effective measure. EUR/SEK trades broadly stable below 10.50.

The Financial Times reports that US bank executives indicate minimal interest in the Fed’s $600bn Main Street Lending Programme, aimed at supporting midsized companies through the coronacrisis. Details and the complexity of the MSLP discourage potential borrowers who also have been able to tap the bond market cheaply. The minimum amount companies can take up is already lowered from $1 million to $250k to make it MSLP more attractive, with Fed Chair Powell not ruling out a further reduction.


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