Market movers today
- Markit will release May Flash PMIs for both Euro Area and the US. Euro Area indices are expected to continue rising as restrictions have been eased further. Survey medians expect US figures to tick down slightly following a decline in ISM indices in April.
- Euro Area Flash Consumer Confidence will also be released for May. ECB’s Lagarde will give a speech in the afternoon, followed by Fed’s Kaplan, Bostic, Barkin, and Daly later in the evening.
The 60 second overview
EU-China controversies: The European parliament yesterday, in overwhelming fashion, voted on a declaration to stop further political progress on a market access treaty for EU firms operating in China. The treaty, which was finalized in December, has to pass the parliament in order to come into force and also faces headwinds on a national level. The move comes after China has retaliated sanctions put in place by the EU on Chinese officials following the human rights violations taking place towards Uyghur Muslims.
Global minimum corporate tax: Under the Biden presidency the US administration has returned to OECD negotiations regarding a global minimum corporate tax rate. The Treasury Department has proposed 15%, but alongside this proposal comes a requirement that the minimum tax rate applied to U.S. firms is a minimum of 21%. The move comes ahead of negotiations to increase the U.S. corporate tax rate from 21% to 28%.
Leverage ratio: The Basel committee has initiated a review on the effectiveness of capital requirements following the lessons learned during the pandemic. Risk.net reports that this will include whether to recalibrate the leverage ratio about which much has been said following the temporary exclusion of central bank reserves in the calculation by both the Fed and the ECB. In case a revision recommends to exclude central bank reserves for good it will likely come with a higher leverage ratio requirement such that the total capital requirement remains unchanged. This feature is already present in the existing regulation.
Equities: Equities rebounded across all regions yesterday. Intraday volatility eased and cyclicals took the lead, with growth and large caps the winning styles. Most sectors stood higher (energy the only exception) as the risk sentiment stabilized, but tech was the standout in most regions. While VIX eased somewhat it still remains north of 20, so investors are not entirely peaceful. US closed around session highs with S&P up 1.1%, Nasdaq 1.8%, Russell 2000 0.6% and Dow 0.6%. Asian markets are mostly tagging along this morning, and US futures point to second streak of gains.
FI: Stabilization or just a short-term correction? Yesterday 10Y BTPS-Bund spread tightened some 6p after having widened for most of April and May. Hence, is this the first sign of stabilization after an extended period with a widening of the spreads between core and semi-core EU bonds and core and peripheral government bonds. We have also seen the Bund ASW-spread stabilize and rebound. In the US market, Treasuries rebounded and 10Y US treasury declined some 4bp and the curve flattened from the long end.
FX: The near-term balance of risks appears balanced for spot dollar, if not slightly to the upside. EUR/NOK is now back above 10.15 and despite risk rebounding during the US session NOK struggled to erase losses. PLN strengthened yesterday on the back of strong macro releases and hawkish CB communication. The RUB found support from the waning geopolitical risks. EUR/DKK continues to trade close to the 7.4360 mark, which triggered FX intervention the past three months.
Credit: Sentiment improved in credit yesterday where iTraxx Xover tightened 3bp (to 258bp) and Main ½bp (to 52bp). Cash bonds, however, remained slightly under pressure and HY only managed to tighten 1bp and IG widened ½bp.