Markets hit the pause button after surging yesterday. Asian investors gradually turned a bit more cautious throughout the session while European equities gapped lower right at the start of the dealings. A disappointing 7.8% m/m May rebound in German industrial production after the -17.5% slump in April was an additional queue for investors to take some profit. In its interim summer forecasts, the European Commission warned for a longer-than-previously-expected recovery from the coronavirus crisis. It revised growth projections for the euro zone downwardly and now sees GDP contracting 8.7% this year instead of 7.7%, followed by a 6.1% recovery in 2021, provided there are no second full lockdowns. Risks are “exceptionally high and mainly tilted to the downside”. France, Spain and Italy are now all expected to print >10% declines. Germany would shrink 6.3%. The EC warned for more intra-EMU economic divergence as the pace of the recovery can vary a lot across countries. Stocks extended their decline in the wake of the report before bottoming and hovering sideways starting around noon. Current losses range from 0.8-1.3% with Germany lagging peers. Core bonds were once again an ocean of tranquility. US yields decline at the very long end (-1.5 bps, 30-yr). The German yield curve bear flattens with the belly underperforming with investors perhaps eying tomorrow’s 2025 bond auction. Yields rise 1.4 bps (2-yr) to 2 bps (5-yr). Peripheral spreads tighten with Greece (-5 bps) outperforming after the EU announced it will provide the country with debt relief measures of about €750 mln. The money comes from profits made by euro zone central banks on Greek government bonds and the reduction to zero of the step-up interest margin on certain euro zone loans to Athens.

• The US dollar was well bid initially against the backdrop of some mild risk-off. However, most of those gains were pared intraday even as sentiment remained vulnerable. EUR/USD fell from the low 1,13s towards 1,126. This 23.6% Fibo retracement area acts as a EUR/USD support, suggesting the upleg after hitting it is at least partially technical in nature. The pair is currently arm-wrestling for the 1,13 barrier. We’re seeing a similar (mirror) picture for the trade-weighted dollar (DXY) where support at 96.62 was being tested several times recently but remains in tact for the time being. DXY is changing hands near 96.83. The dollar makes up for yesterday’s losses against the yen, trading around 107.66. That’s up from 107.4 this morning in a sign the dollar is still preferred over the yen when sentiment turns a bit more sour. Sterling enjoys quite a good run, defying the classical risk correlation just the way it did yesterday. EUR/GBP falls from 0.905 to 0.901, erasing all of Monday’s profits. Brexit negotiators Frost and Barnier will hold informal talks over a private dinner tonight, PM Johnson spokesman said. Some believe these backdoor talks might bear more fruit.

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In its annual employment outlook, the OECD expects the jobless rate over the 37 member states still to be at  9.4% by the end of this year. The OECD unemployment rate during the financial crisis topped at 8.7% in October 2009. Unemployment is still expected at 7.7% at the end of 2021 even in a scenario of no second outbreak of the virus. The organization advocates labour market interventions such wage subsidy schemes to be more selective and more adapted to the need of different companies, workers and households.

The unemployment rate in the Czech republic rose 3.7% of the workforce in June from 3.6% in May, according to data from the Labour Ministry. The total number of jobless people rose slightly from 266k to 269.6k.  The government is considering to extend an employment support scheme after its planned end at the end of August.


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