Of late, equities mostly guided price action on other markets and this was again the case today even as the reaction wasn’t unequivocal across fixing income or FX trading. This time, Chinese markets took the lead in a new risk-on equity up leg at the start of the week. The Shanghai Composite index rose a staggering 5.67%. The move was as at least partially attributed to positive comments in state-related media, indicating that a healthy equity rally might be important to support the economic recovery. European indices opened with gains of about 2%+, but the move soon met resistance (currently gains slightly below 2.0%). German May factory orders disappointed rebounding only 10.4% M/M (after a 26.2% decline in April) and are still 29.3% below the May 2019 level. The data weren’t an important driver, but core European yields hardly profited from the positive sentiment. An initial dip in the Bund future contract was  short-lived. German yields show moves of one to two bps. The reaction on the US interest rate markets was more energetic. The US yield curve bear steepens with yields rising between 0.6 bp (2-y) and 4.4 bp (30-y). 10-y Intra-EMU spreads versus Germany continue their gradual tightening (Italy -3 bp).

Interesting price action on the FX markets today. The link between EUR/USD and global risk sentiment recently wasn’t one-on-one. Still, today global dollar weakness prevailed and the euro was the main beneficiary even as interest rate differentials widened slightly in favour of the USD. EUR/USD was well bid from the start in Asia and already tested last week’s top in the 1.13 area early in European dealings. The pair finally broke this level on broader USD selling. EUR/USD (1.1330 area) is nearing intermediate resistance at 1.1349 with 1.1422 marking the early June top. USD/JPY initially profited from the positive risk sentiment (yen weakness) but soon joined the broader USD decline to currently trade little changed in the 107.50 area.

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Sterling is trading mixed, even slightly disappointing today. Cable turned to the 1.25 mark, but at the same time, sterling lost against the euro. EUR/GBP rebounds off the 0.90 support (currently 0.9050 area). The UK construction PMI pointed the sector returned to growth (55.3 from 28.9 versus 46.0 expected), but didn’t help sterling much. The sterling underperformance  maybe is due to comments from BoE’s Baily as he warned banks on operational challenges of negative rates, as potential sign that the debate on negative rates is still developing within the BoE.

News Headlines

Saudi Arabia hiked official selling prices with $1 a barrel to Asia as it sees demand there gradually recovering from the coronavirus hit. Oil prices rose, enjoying an additional boost from the global risk-on mood. Brent oil climbed to $43.3/b though tested key resistance (again) at around $43.5 earlier today.

The World Bank silently shelved its plans for a second auction of their pandemic bonds, erected in the wake of the Ebola outbreak in 2014. The first round drew a lot of criticism for its conditions being too strict and thus being too slow to pay out to poor nations in need after the coronavirus broke out. The World Bank eventually distributed $200 mln to 64 countries.

Argentina presented an improved offer to holders of $65bn of foreign debt. With the latest offer, it hopes to break the stalemate with its bondholders since it defaulted in May. Argentina proposes to raise interest payments, which will start a year earlier than under previous offers (2021), stretch maturities until 2046 and cut losses on debt holders’ initial investments. An Argentine newspaper calculated the offer was equivalent to a net present value of 53.3 cents on the dollar.


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