Markets

Today, several countries/regions including the EMU published Q2 GDP data. According to the first estimate, activity in the EMU contracted 12.1% Q/Q (as expected) bringing activity 15.0% below the level of the same period last year. EMU headline CPI printed slightly higher (or is it less low) than expected at -0.3% M/M and 0.4% Y/Y. The core measure even rose from 0.8% Y/Y to 1.2%. However, higher than expected inflation for sure isn’t what the market is currently worried about. Investors are still mainly pondering what will be the picture for growth and employment as the second wave of the corona virus is building. Again it was a bit difficult to label global sentiment as being risk-on rather than risk-off. Equity markets (In particular tech/the Nasdaq future) rose after strong results from the likes of Facebook, Apple and Amazon yesterday evening. However, gains in European equites remained limited at around 0.5% and this is also the case for a mixed open of the Dow and the S&P. Investors also still await the outcome of the negotiations in Washington on a new fiscal package. Given recent developments with respect to the corona pandemic and regarding the economy, no agreement on a package or much reduced support, e.g. for unemployed, would have big consequences for US demand. Equity markets apparently are quite confident that some support will come, in one way or another. Bonds initially remained will bid this morning. Some end of month positioning was probably still in play. US and German yields gradually started a cautious comeback and the move was reinforced by a stronger than expected US Chicago PMI. US yields currently very between little changed (2-y) and 2.2 bp higher (30-y). German yields show a similar picture. (30-y + 2.9 bp). Intra-EMU spreads widened only marginally (1-2 bp) despite a very sharp contraction of growth in Q2 in the likes of Italy (-17.3% Q/Q) and Spain (-18.5% Q/Q). The impact of the crisis on EMU countries’ credit quality obviously is no issue for markets anymore with the ECB and the EMU fiscal pact seen as providing a backstop. Spanish and Italian yields even touched a new post-March low early this morning but rebounded later in line with the global trend on interest rate markets.

On the FX markets, at the opening this morning it looked that the dollar would simply continue its downtrend. At the same time, gold also briefly touched a new all-time top (spot $ 1983P/ounce). EUR./USD tested the 1.19 big figure. Finally, some (end of month?) profit taking on this USD short trade kicked. EUR/USD currently trades in the 1.1825 area. The TW dollar returned to the 93 area. US yields not declining further during the day also eased some of the USD selling pressure. That said, ever lower real bond yields were a negative for the dollar of late. Question is whether this will change anytime soon. If Congress would fail to reach a deal in a new stimulus package, it probably would also further weigh on the dollar. The yen underperformed today. USD/JPY (105.55 area) took the lead in the intra-day USD rebound. EUR/JPY is extensively testing/breaking the 124.29/43 resistance and touched a 2020 top. Sterling continued its recent outperformance even as there was again little UK specific news. Cable (1.3150 area) continues setting a new correction top against the dollar and profits from intraday correction of EUR/USD against the euro. EUR/GBP is testing the 0.90 barrier. .

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The Czech Republic also published a first estimate on its Q2 GDP today. The economy contracted 8.4% Q/Q to be down 10.7% Y/Y . However, analysts had expected growth in this cyclically exposed economy (dependence on the auto sector etc..) to have been even bigger (-10.1%). EUR/CZK is holding a tight range in the 26.20 area. Dollar weakness recently was a modest positive for the Czech korona.

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