Global Markets Enjoyed A ‘Full-Option Risk-On Session’ Yesterday With Equities

Markets

Global markets enjoyed a ‘full-option risk-on session’ yesterday with equities, bonds and FX reacting accordingly. In weekend interviews, Fed Chair Powell highlighted the sever impact of the corona pandemic but reiterated the Fed’s commitment to support the economy. Two events accelerated the rally. Biotech firm Moderna reported promising results from tests on a vaccine. Late in European dealings, German Chancellor Merkel and French President Macron, launched a proposal for a €500 bln rescue fund. The Fund will be developed within the EU budget and the EC will be able to raise additional money on the capital markets. The proposal needs the backing of the EU members states, but markets see its as a potential step toward shared financing on an EU level. European equites closed with gains of 5%+. US indices finished 2.4% (Nasdaq) to 3.85 % (Dow) higher. US and German yield curves bear steepened. US yields rose between 2.2 bp (2-y) and 11 bp (30-y). German yields rose from 3.9 bp to 7.7 bp. Intra-EMU spreads over Germany narrowed further on the rescue fund proposal, with Italy (-25 bp) and Greece (-14 bp) outperforming. After a limited uptick early in Europe, the dollar started a protracted intra-day decline with the TW-dollar (DXY) closing well below the 100-barreir (99.66). EUR/USD also profited from the overall USD softening with an additional upleg after the German-French fund proposal. The pair cleared 1.0875/95 resistance area and closed at 1.0912. The risk-on and higher US yields also supported USD/JPY but gains were modest (close 107.33). Sterling initially profited from the risk-on but EUR/GBP reversed its earlier decline on the euro rebound later in the session (close 0.8950).

Asian equities join the risk rally from Europe and the US yesterday, but gains are more modest (up to 2%). A flaring up of trade frictions between Australia and China (cf. infra) and President Trump’s threat to permanently freeze US WTO funding for now have only limited impact on global trading. Even so, the yuan continues trading soft despite the overall USD correction (USD/CNY 7.11 area). The Aussie dollar rebounded north of 0.65, but the 0.6570 resistance looks strong.

Later today, German ZEW investor confidence is expected to improve slightly both for the current situation and the expectations subseries. We expect no big market reaction. Fed Chair Powel (and Treasury Secretary Mnuchin) will testify before the Senate banking committee. Text of testimony is already available. Powell reiterated the Fed will use its full range of tools to support the economy and that rates will stay at current low level until the economy is on track to achieve the goals of maximum employment and price stability. In a daily perspective, we assume that the risk rally might shift into a lower gear after yesterday’s forceful move. US 10-yields have rebounded in the 0.62%-0.78% range, but to topside looks well protected. The short-term technical picture of EUR/USD improved after yesterday’s break north of 1.09, but the 1.10 area will probably remain tough resistance. The EUR/GBP held well north of 0.8860/75 previous range top. BoE’s Tenreyro yesterday said that negative interest rates have had positive effects elsewhere, keeping recent debate on a negative policy open. This might continue to weigh on sterling. Today, the UK eco calendar contains the UK labour market data.

News Headlines

Australia was dumping barley on Chinese markets, its Ministry of Commerce confirmed yesterday. China announced anti-dumping and anti-subsidy duties totaling more than 80% on Australian barley imports thereafter. The move comes after already suspending beef imports from four Australian abattoirs. Australia considers going to the WTO.

Germany and France came up with a more than €500bn EU recovery fund that would grant – not lend – the money to countries that have been hit the hardest. The European Commission will take care of the funding on capital markets while the repayment occurs through the EU budget – of which the largest part comes from Germany.