Markets already forgot about yesterday’s off-day and turned bullish once more. A press release by Moderna communicating the positive test results from a Covid-19 vaccine lifted overnight/Asian sentiment and reverberated throughout the European session into US dealings. EMU stocks opened with gains of about 0.8-1% before extending the upleg around noon on mere rumours AstraZeneca will release “positive news” on the coronavirus vaccine it’s developing. European equities advance less than 2% with major indices (EuroStoxx50, DAX30) eying important resistance (June high). WS rises 0.8-1.4%. Goldman Sachs crushed Q2 earnings estimates thanks to blowout trading results, copying the playbook of JPMorgan and the likes. US eco data topped expectations (see below). There was no visible reaction but it sure did little to undermine overall sentiment. Core bonds opened lower but pared all losses and more during early European dealings. Classical risk dynamics eventually did prevail, with USTs and the German Bund ceding ground. The US yield curve bear steepens. Yields rise 1.5 bps (5-yr) to 3.8 bps (30-yr). German yields eke out 2 bps on the long end of the curve (30-yr). Peripheral spreads to core narrow up to 2 bps (Italy, Greece).
The greenback’s attempt this morning to recover from yesterday’s hit failed miserably. On a trade-weighted basis, DXY is on track for a four-day losing streak amid broad market buoyancy. DXY fell from 96.26 to 95.86 currently and is closing in on important support near 95.72, effectively the last hurdle before the March low of 94.65. In a mirror move, EUR/USD overcame initial weakness to surge from intraday lows at around 1.14 to 1.144 at the time of writing, thus surpassing the June high of 1.1422. A sustained break paves the way towards the March high of 1.1495 from a technical perspective. The Japanese yen trades interestingly, eking out gains despite the bright risk mood. USD/JPY goes from 107.5 to 106.76. EUR/JPY pushed through the 122 resistance yesterday but forfeits some gains today (122.12). Sterling advanced despite negative rates talk. UK inflation came in slightly higher than anticipated but went unnoticed. Today’s price action is technical in nature. EUR/GBP is taking a breather after 2 strong days. The pair trades near 0.905, down from 0.907. Cable rises to 1.264 to remain in the upper half of the sideways range.
BoE Tenreyro is ready to vote for additional monetary stimulus if necessary to support the economy and ensure that inflation returns to target. She fears that the UK economy’s rebound will rapidly lose steam because of continued risk aversion, voluntary social distancing, mandatory restrictions and higher unemployment. She considers negative policy rates as a “live” option.
US Empire Manufacturing business sentiment continued its rebound in July, rising more than forecast from -0.2 to 17.2, the highest level since 2018! The gradual reopening of the economy mainly translated in stronger orders and shipments, while employment barely improved. Optimism about economic conditions the next six months dampened from strong levels as COVID-19 infections blaze through several US (sun belt) states. June US industrial and manufacturing production rebounded by 5.4% M/M and 7.2% M/M respectively. Industrial output remains some 10% below pre-COVID levels with the annualized 42.6% drop in Q2 being the biggest in the second world war.
OPEC+ decided as expected to gradually taper oil production cuts from August onwards. The extra demand should be digested by the fresh pick-up in demand. OPEC+ will withhold 7.7 million barrels a day in August, compared to 9.6 million currently. Countries that didn’t fulfill commitments in May and June promised some additional compensation production cuts in August and September. Brent crude remains cement around the $43/barrel mark.