After yesterday’s Fed policy decision, the focus of global markets today turned the eco data. Several countries published Q2 GDP figures and other data measuring the damage of the corona pandemic on the economy. German/EMU data were a mixed compared to consensus expectations. German activity contracted 10.1% Q/Q in Q2, bringing activity 11.7% below a comparable level last year. A slightly more modest contraction (-9.0% Q/Q) was expected). The corona crisis not only pressured activity, also prices. German July HICP inflation declined 0.5% M/M bringing the Y/Y measure at exactly 0.0%. However, as the decline was mainly driven by a VAT cut, the outcome can be considered positive rather than negative for consumers. Also, on the positive side of the story, German official registered unemployment declined 18 000, keeping the unemployment rate at 6.4%. In EMU, EC economic confidence in July improved more than expected but the June unemployment rate jumped to 7.8%. As said, data were mixed, but still provided a hard reality check. At least it wasn’t enough to lift sentiment. Investors realized that the hope for a V-shaped recovery is fading and corporate earnings also highlighted the impact on activity. European equites opened in negative territory despite yesterday’s supportive message from Fed’s Powell and the risk-off only deepened throughout the session. In the US, US Q2 GDP plunged an unprecedented 32.9% QoQa. Consumption contracted 34.6%. The contraction in activity is also causing a deflationary price dynamics (core PCE -1.1% Q/Q). At the same time of the GDP data, US initial weekly jobless claims were reported at 1.43 mln up from 1.42 mln previous week, but slightly lower than expected. In global, the US data also can be considered as close to expectations. The data had little direct impact on trading. Sentiment was risk-off and stayed risk-off. A tweet of US President Trump raising the idea of delaying the November election didn’t help to restore confidence. European equities currently show losses of 3% to 4.%. US equites opened 1% lower and are declining further. After the close of the US markets this evening several key tech bellwethers (Apple, Alphabet; Amazon and Facebook) will deliver Q2 results!

Uncertainty on the pace of the reopening of the economy is also very apparent in the price action on the bond markets. Both US and German yield curves continue an aggressive bull flatting, with key technical levels being broken or under heavy strain. US yields decline between 1.0 bp (2 y) and 3.5 bp (30-y). The US 10-y yield is testing the 0.54% support that provided a bottom in the era following the March volatility. The German 10-y yield is now decisively trading below the -0.5% reference of the ECB deposit rate. Interest rate markets clearly are convinced on the commitment of the central banks (the Fed and others) to keep rates ultra-low for long. However, this time it doesn’t help confidence anymore. 10-y intra-EMU spreads versus German are widening up to 3 – 4 bp (Greece/Italy). However, given the sell-off/volatility in other markets, this should still be considered as orderly price action.

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Initially it looked that the risk-off would finally ease some of recent pressure on the dollar. EUR/USD drifted lower in the 1.17 big figure. The TW dollar tested the 93.7 area. However, the intra-day rebound was again overthrown after the Trump Tweet raising the idea of delaying the election. The TW dollar (DXY) is again trading in the 93.30 area. EUR/USD retested the 1.18 area. Surprisingly, the yen hardly profits. USD/JPY is holding in the 105 area. There were again few eco data in the UK. In line with price action earlier this week, sterling succeeded to stay out of the market volatility. Cable regained the 1.30 barrier. EUR/GBP drifted further south to currently trade in the 0.9040 area. This sterling ‘outperformance’ occurs even as UK Gilts yields also continue to decline further.

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Belgium also published preliminary Q2 GDP data. Economic activity contracted by 12.2% in Q2, after already a decline in activity of 3.5% Q/Q in Q1. Activity in Q2 was 14.5% below last year’s level. The Belgian unemployment in June rose from 5.4% to 5.5%. CPI inflation rose 0.22% M/M to be up 0.73% Y/Y (from 0.6%). However, core inflation (excluding energy and unprocessed Food) eased to 1.31% from 1.41%.


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