Friday, 24 April 2020

P. 1

Rates: Defensive approach ahead of the weekend

Horrible economic data and bad news on a possible drug against the coronavirus caused a gradual intraday risk reversal. Core bonds ended higher, flattening the curves. We take a defensive approach ahead of the weekend with the fragility of the Easter rally once again exposed. Merkel and Trump warn for social distancing measures to be longer applied.

Currencies: Direction south remains path of least resistance for EUR/USD

EUR/USD jumped up and down mostly just north of the 1.0770 support yesterday. Finally, a reversal in risk sentiment and unclear outcome of the EU summit is putting the support under pressure. A risk off context might favour still the dollar going into the weekend. EUR/GBP is also nearing the 0.87 support area.

Calendar

• US equities erased an intraday gain of as much as 1.8% to end flat following

reports an experimental coronavirus trial disappointed. Asian stock markets trade mostly in the red with South-Korea underperforming (-2%).

• The touted Gilead Covid-19 drug remdesivir yielded poor results in a Chinese trial, a document accidentally published by the WHO showed. Gilead downplayed the report, saying the trial had to be concluded early.

• Public companies considered critical to national security seeking a share of the $17 bn relief will have to offer the government an equity stake, USTS Mnuchin said. For private companies Mnuchin may accept senior debt instruments.

• EU leaders will ask the EC for a recovery fund within the 7y-budget. Merkel said Germany is prepared to make a substantial contribution. Disagreement over the size and whether loans or grants should be distributed remains, however.

• The PBOC lowered the interest rate on its targeted medium-term lending facility (TMLF) by 20 bps to 2.95% amidst the partial roll-over of TMLF loans maturing. With it, the central bank injected some $8 bn into the economy.

• According to the Japanese minister of economy, the country’s stimulus will boost real GDP by about 4.4%. The relief package swelled to a record $1.1 tn. Rumours circulated yesterday that the BoJ will discuss unlimited bond buying.

• Today’s rather meagre economic calendar contains US capital goods orders and shipments. The April IFO indicator is due in Germany. Italy taps the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 24 April 2020

P. 2

Defensive approach ahead of the weekend

Oil prices stabilized for a second straight session and initially prolonged Wednesday’s more constructive risk sentiment. Core bonds had a difficult start, but recovered early losses as dealings evolved. April EMU PMI’s crashed at an unprecedented pace to an unprecedented level while US weekly jobless claims (+4.43mn) bring the 5-week tally in excess of 26 million. The straw that broke the camel’s back eventually came from an FT article reporting on a failed clinical trial from Gilead’s hyped drug against the coronavirus. US stock market gains evaporated. The US yield curve flattened with yield changes ranging between +0.6 bps (2-yr) and -3.4 bps (30-yr). The German yield curve bull flattened with yield down by 0.9 bps (2-yr) to 2.2 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 8 bps with Greece (-21 bps) outperforming. The 3-month Euribor rate spiked from -0.24% to -0.16%, the highest fixing since early 2016. The spread over the EONIA rate rose to 29 bps, the highest level since 2012. It could be a sign of brewing financial stress and might be one of the reasons why the ECB eased eligibility criteria in its market operations (allow assets up to two notches below investment grade).

Asian stock markets are under pressure as well this morning, losing up to 1.5%. Core bonds build on yesterday’s final gains. EU leaders passed the torch to the European Commission to carry the load of emergency assistance. Apart from short term programmes (€100 bn SURE by EC, €200bn EIB loan program & €240bn ESM) they rubberstamped the creation of a long term tool to support the economy (attracted and redistributed through the EU budget; €1.6-2tn). German Chancellor Merkel and US President Trump warned that social distancing measures will remain longer in place.

Today’s eco calendar contains April German Ifo business sentiment and March US durable goods orders. Bad outcomes are expected and probably discounted. Yesterday’s market sensitivity to the failed Gilead clinical trial is telling for the fragility of the Easter risk rally. We therefore take a defensive stance ahead of the weekend. Such circumstances could be beneficial for core bonds. Also longer term we continue to err on the side of caution as we anticipate a deeper economic hit and especially a much slower recovery than currently discounted.

From a technical point of view, the German 10-yr yield is trying to find a fresh equilibrium. For US yields, the Fed’s unlimited QE announcement is the de facto start of curve control probably reducing volatility. A trading range between 0.5% and 0.8% opened up.

Rates

US yield -1d2 0.22 0.015 0.36 0.0010 0.60 -0.0230 1.16 -0.03

DE yield -1d2 -0.67 -0.015 -0.61 -0.0110 -0.42 -0.0230 -0.03 -0.02

Af

German 10-yr yield: trying to find fresh equilibrium. US 10-yr yield: unlimited QE by the Fed de facto start of curve control?

Friday, 24 April 2020

P. 3

EUR/USD: direction south remains the path of least resistance. 1.0770 supporting is breaking

EUR/GBP: inching toward the 0.8680/0.87 support.

EUR/USD: drifting below the 1.0770 support EUR/USD jumped up and down yesterday, close to but mostly north of the 1.0770 support. Awful EMU PMI’s pushed the pair below 1.08 and a real test occurred at the onset of US trading. EUR/USD got temporary support from a better risk sentiment. Headlines also suggested that EU leaders were making progress on a rescue package, but both factors ebbed later. US equities reversed earlier gains. EU leaders asked the EC to work out a ‘big’ rescue package via the EU budget. However, the divide on whether most of the aid should be provided by grants rather loans persisted. EUR/USD closed the session at 1.0777. USD/JPY spiked temporarily higher on rumours that the BOJ was considering unlimited bond buying, but the yen even closed the day slightly stronger at 107.60. This morning, sentiment on Asian equity markets is modestly risk-off after the intraday setback on WS. The yuan reverses yesterday’s gain (USD/CNY 7.085). The Aussie dollar show (remarkable) resilience (AUD/USD 0.6350). EUR/USD still struggles not to fall below the 1.0770 area. USD/JPY (107.65) is holding the recent sideways trading pattern. Japanese deflationary pressures persist as the March CPI printed at 0.4% Y/Y, with probably more pressure to come. Today’s US March durable orders are expected to show a big decline, but from a market point of view it will only confirm the story received from more timely eco data. The German Ifo business climate will probably also copy the free-fall in the EMU PMI’s. This won’t be ‘news’ either but a big disappointment might still weigh on the euro, especially as sentiment looks fragile this morning and as investors might hold cautious/risk-off bias going into the weekend. The 1.0770 support is now under severe strain and any USD strength ahead of the weekend might push the domino. We don’t expect a sharp euro sell-off, but south is the way of least resistance. The March low (1.0636) is the next high profile reference on the technical charts. EUR/GBP mostly followed the intraday price pattern of EUR/USD. In this respect sterling, contrary to the euro, ignored a similarly sharp drop in UK PMI’s. EUR/GBP closed at 0.8730. Selling pressure from EUR/USD might continue to weigh on the EUR/GBP pair. However as this is at least partly USD strength, the impact on EUR/GBP might be more modest. EUR/GBP 0.8680/0.8700 remains an important support.

Currencies

R2 1.125 -1dR1 1.1109EUR/USD 1.0777 -0.0046S1 1.0770S2 1.0636

R2 0.9212 -1dR1 0.9033EUR/GBP 0.8730 -0.0045S1 0.8621S2 0.8569

Friday, 24 April 2020

P. 4

Friday, 24 April Consensus Previous US 14:30 Durable Goods Orders (Mar P) -12.0% 1.20% 14:30 Durables Ex Transportation (Mar P) -6.50% -0.60% 14:30 Cap Goods Orders Nondef Ex Air (Mar P) -6.70% -0.90% 14:30 Cap Goods Ship Nondef Ex Air (Mar P) -7.00% -0.80% 16:00 U. of Mich. Sentiment (Apr F) 68 71 Japan 01:30 Natl CPI YoY (Mar) 0.40%A 0.40% 01:30 Natl CPI Ex Fresh Food YoY (Mar) 0.40%A 0.60% 01:30 Natl CPI Ex Fresh Food, Energy YoY (Mar) 0.60%A 0.60% 06:30 All Industry Activity Index MoM (Feb) -0.50% 0.80% 07:30 Nationwide Dept Sales YoY (Mar) -- -12.20% 07:30 Tokyo Dept Store Sales YoY (Mar) -- -12.80% UK 01:01 GfK Consumer Confidence (Apr P) -34A -34 Germany 10:00 IFO Business Climate (Apr) 79.7 86.1 10:00 IFO Expectations (Apr) 75 79.7 10:00 IFO Current Assessment (Apr) 80.5 93 Belgium 15:00 Business Confidence (Apr) -21 -10.9 Events Q1 earnings American Express, T-Mobile, Raytheon … 11:00 Italy to Sell Bonds

Calendar

Friday, 24 April 2020

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 0.60 -0.02 US 0.22 0.01 DOW 23515.26 39.44DE -0.42 -0.02 DE -0.67 -0.01 NASDAQ 8494.753 -0.63BE 0.19 -0.06 BE -0.43 -0.04 NIKKEI 19262 -167.44UK 0.29 -0.04 UK 0.06 -0.03 DAX 10513.79 98.76

JP -0.02 -0.03 JP -0.17 -0.02 DJ euro-50 2852.46 17.56

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.22 0.38 0.45 Eonia -0.4540 0.00005y -0.19 0.45 0.47 Euribor-1 -0.4020 0.0160 Libor-1 0.5698 0.000010y -0.02 0.64 0.53 Euribor-3 -0.1610 0.0290 Libor-3 1.0203 0.0000

Euribor-6 -0.1140 0.0100 Libor-6 0.9906 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.0777 -0.0046 EUR/JPY 115.95 -0.68 CRB 113.49 2.38USD/JPY 107.6 -0.15 EUR/GBP 0.8730 -0.0045 Gold 1745.40 7.10GBP/USD 1.2344 0.0010 EUR/CHF 1.0520 0.0003 Brent 21.33 0.96AUD/USD 0.637 0.0047 EUR/SEK 10.8492 -0.0765USD/CAD 1.4073 -0.0088 EUR/NOK 11.4652 -0.1893

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