After a more cautious start of the third quarter, especially in Europe, global (equity) markets again embraced an outright risk-on modus yesterday. Numbers of new COVID-19 infections worldwide and in the US continue to rise at a record pace, slowing or even reversing the reopening of the economy. However, for now, markets apparently don’t see it profoundly changing the path of economic recovery which is supported by ample monetary and fiscal support. Yesterday’s data gave investors some additional comfort for their positive assessment. EMU unemployment rose far less than expected to 7.4% from 7.3% as several support programs prevent more widespread lay-off. Initial optimism was reinforced by June US payrolls. The BLS reported a 4.8 million rise in jobs in June, beating the 3.23 million consensus and extending the unexpected rise payrolls growth in May. The US unemployment rate declined from 13.3% to 11.1%. US jobless claims showed a more balanced picture. Initial claims eased less than expected to 1.427 mln and continuing claims even rose marginally to 19.29 mln. These more timely indicators might indicate a slowing in the improvement due to the new spike in infections. Even so, it didn’t hurt market sentiment. European equities closed with gains of mostly between 2.5% and 3.5%. US indices also took a strong start but finally fell prey to modest profit taking going into the long weekend (close with gains of about 0.5%). In line with recent price action, bond markets decoupled from the risk rally and developed rather autonomous, technical trading dynamics. US yields were little changed between -1.5 bp (5 y) and +0.4 bp (30-y). German yields declined between 2.4 bp (2-y) and 3.4 bp (5-y). The dollar initially suffered from the risk-on. The TW dollar (DXY) dropped temporarily below 97 and EUR/USD tested the 1.13 area, but the US currency drew some comfort for the strong US payrolls too. EUR/USD closed even marginally lower at 1.1239. USD/JPY again held an extremely tight range (close 107.50). EUR/GBP also didn’t go anywhere (close 0.9014).
This morning, Asian equities mostly show modest gains, building on the positive performance of WS, but trading mainly develops in thin market conditions. The Caixin China services PMI showed an unexpected sharp rise from 55.00 to 58.4, confirming the recovery of activity. The yuan is trading little changed at USD/CNY 7.0650. The (TW) dollar maintains yesterday’s intraday gain (DXY at 97.25; EUR/USD 1.1235 area). Australia retail sales in May (+16.9% M/M) also reversed the April decline. The Aussie dollar gains marginal ground (AUD/USD 0.6930 area).
Later today, the eco calendar only contains the final EMU services PMIs. US markets are closed for the 4th of July holiday. Trading in global markets will mostly be order driven and technical in nature. The equity rally might take a breather. Bonds remain resilient despite recent risk-on. We expect more sideways trading. Yesterday’s EUR/USD performance was a bit disappointing after a strong start. Still we look for more bottoming with 1.1160/1.12 area providing solid support. Sterling was in better shape this week with EUR/GBP returning to the low 0.90 area. A constructive risk sentiment might help putting a floor for the UK currency. However extremely low interest rates and lingering uncertainty on the Brexit negotiations probably make an aggressive decline below EUR/GBP 0.90 difficult.
A broad German alliance of Merkel’s coalition parties with the Greens and the Liberal Democrats have voted to formally accept the ECB’s underpinnings of its bond buying programme (PSPP). The country’s top court judged in May that the German parliament should have been able to challenge the programme on its proportionality and gave the ECB 3 months for providing an explanation before the Bundesbank would stop carrying out its monetary policy.
Junk bond funds recorded the biggest money outflow since the coronavirus triggered a massive sell-off in virtually all asset classes. In the week ending July 1, some $3.4bn was withdraw, thereby ending a 13-week streak of inflows totaling to $54bn. The move is a sign of investor caution as coronavirus cases in the US started to pick up again (strongly) coupled with overall profit-taking after the stellar rally since the coronavirus peak.