Markets

Anyone who doubted stock markets resilience during the second half of June is again proven wrong at the start of the third quarter. Stock markets continued to show vigor against a background of first and second COVID-19 waves flooding global economies. European indices’ tally currently stand at +2.5% for the day. The EuroStoxx 50 is currently testing the final technical hurdle (3318) before the recovery high (3395). Initial optimism was lifted further by June US payrolls. The market reaction says more about sentiment than the about the payroll outcome, which probably gives little forward guidance given fresh lockdown measures introduced by US States. The Bureau of Labour Statistics reported 4.8 million job gains in June, clearly beating 3.23 million consensus while the previous two months’ payrolls faced only a net revision of 90k. Employment in leisure and hospitality rose sharply (+2.1 million). Notable job gains also occurred in retail trade (+740k), education and health services (+568k), other services (+357k), manufacturing (+356k), and professional and business services (+306k). The improvements in the labour market reflected the continued resumption of economy activity that been curtailed in March and April. The US unemployment rate declined from 13.3% to 11.1%. Although unemployment fell in May and June, the jobless rate and the number of unemployed are up by 7.6 percentage points and 12 million, respectively, since February. The number of permanent job losers continued to rise, increasing by 588,000 to 2.9 million in June. A better labour market indicator for comings months, weekly jobless claims, more or less stabilized above 1400k, while consensus expected a further decline. Continuing claims hover around 19.3 million. Anyway, the payrolls report provided (US) investors with the perfect excuse to lift stocks even higher ahead of the long weekend. US markets are closed tomorrow for early Independence Day celebrations. Payrolls saved the dollar from a new beating. In the run-up, EUR/USD touched the psychologic 1.13 mark with the trade weighted dollar slipping below 97 during the positive risk hours in European dealings. Dollar weakness was undone after the official labour market report. Core bonds defied trading logics during the risk rally by staying stoic. The payrolls release only caused a brief spike lower in US Treasuries, which underperform German Bunds in a daily perspective. The US yield curve bear steepens with yields rising by up to 2.3 bps (30-yr). German yields shed 1.5 bps (2-yr) to 2.8 bps (5-yr) with the belly of the curve outperforming the wings. 10-yr yield spread changes vs Germany narrow by up to 3 bps.

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Spanish PM Sanchez announced plans to offer 50 billion euros of state-backed loans to companies, adding to an already existing 100 billion plan. In the same speech, Sanchez also said his country is in need of a tax reform in order to sustain the welfare state. Spain will have to reduce public debt and fiscal deficits resulting from the pandemic and can do so only by increasing the country’s “capacity to collect state revenue”.

European Council President Michel will propose a slightly smaller 7-yr budget to EU governments next week but will keep the goal of a 750 bn euro recovery fund, a senior EU official said. The budget would vary between 1.05 and 1.094tn whereas the Commission proposed a 1.1tn budget. Net contributors to the budget could also preserve their rebates as the EU seeks to dampen opposition from those usually fiscally more conservative countries.

EMU unemployment again rose less than expected in May, from 7.3% to 7.4%, defying 7.7% analyst expectations. The European labour market was probably shield by the massive furlough schemes, preventing instant mass lay-offs. However, most anticipate that the worst has yet to come. The ECB projects unemployment to rise to 10% in Q3.

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