On Friday, markets closed a volatile week in a calm fashion. China reducing the 5-year Prime Loan Rate more than expected gave some comfort that authorities still have some ammunition left to address the economic slowdown. At the same time, it’s evident these measures won’t solve the broader threat of a global cost of living crisis, persistent supply chain issues and other central banks trying to engineer the difficult balance of a soft landing while trying to arrest runaway inflation.
European, and to a lesser extent, US equities tried to regain part of the losses recorded earlier last week. However, it would be an exaggeration to label the move as an outright risk rebound. US equities closed little changed to marginally lower (Nasdaq). Technical factors were also in play. The S&P 500 tested bear market territory (-20% from January top and the 38% retracement of the post-pandemic rebound). Both levels survived in the close, but the battle continues. European indices at the end also only preserved a gain of 0.45% (EuroStoxx 50).
Interest rate markets showed a mixed picture. The US curve bull flattened with yields declining 2.7 bps (2-y) to 6.3 bps (30-y) mainly driven by lower inflation expectations. German yields eased between 3.7 bps (5-y) and 0.5 bps (10-y) while the 30-y rose 4.6 bps. Uncertainty on economic growth further down the road is keeping interest rate markets in a (ST) consolidation pattern after the previous steep rise in yields earlier this year.
The dollar remains strong, but stays away from the cycle peaks reached mid-May. DXY gained marginally (close at 103.15). EUR/USD (close 1.0564) lost a few ticks despite growing consensus on an ECB July rate hike and a mild risk-on. USD/JPY gained marginally (close 127.88). Sterling profited from better than expected UK April retail sales (EUR/GBP close 0.8456 from 0.8487) and signs from BoE governors earlier last week that the BoE will have to raise rates further, even if this is highly uncomfortable given the poor growth outlook.
This morning, Asian equities are trading mixed with Japan outperforming, but China underperforming. A further rise in Beijing Covid cases fuels speculation on further lockdowns with negative impact on growth. US and European equity futures apparently prepare for a corrective rebound. (futures are gaining about 1.0%).
Later today, German IFO business confidence is expected to ease from 91.8 to 91.4. However, tomorrow’s PMI’s probably will be more important for markets. US yields already reversed an important part of Friday’s decline. Even so, we expect more sideways trading as interest rate markets look out how CB’s will react to further signs of cooling in economic activity.
The dollar also continues its correction. DXY (102.69) nears the 102.35 support. EUR/USD is testing the 1.06 area. A sustained rebound north of 1.0642 would be a first sign that downside pressure is easing. I
n an interview with Dutch television this weekend, ECB’s Lagarde again suggested an ECB rate lift-off in July (starting a few weeks after ending APP) but downplayed the chances on a 50 bps hike as was suggested by Dutch ECB Member Knot last week.
Rating agency S&P Global reaffirmed South Africa’s rating at BB-, three notches below investment grade but raised the outlook from stable to positive. S&P Global warned that rising inflation and global monetary tightening could accelerate foreign portfolio outflows. However, recent structural reforms, contained fiscal expenditures and favorable terms of trade (leading to a net external creditor position) along with a flexible currency and deep capital markets will help mitigate those external risks, S&P added. The South African rand strengthens in a first reaction this morning though there’s at least as much general dollar weakness involved. USD/ZAR trades around 15.80.
Australia’s center-left Labor Party ousted now-former PM Morrison’s conservative coalition at Saturday’s general election. The new prime minister, Albanese, was sworn in during a short ceremony today even as the tally has not yet been concluded. Albanese is expected to fly out to Japan later on Monday to have one-on-ones with some of the country’s most important partners, including the US, India and Japan. It is currently unclear whether Labor has secured a majority in the 151-seat House of Representatives or if it will have to work with newly-elected minor parties and independent lawmakers. AUD/USD extends its recent bottoming out this morning, also on general USD weakness. The pair moves closer to the 0.71 big figure.