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[PODCAST] EU Open Rundown 18th May 2020

  • Asia-Pac bourses mostly began the week with mild gains and US equity futures extended on their rebound
  • Fed Chair Powell reiterated the US will not have negative interest rates and post coronavirus recovery could last through 2021
  • President Trump commented that he has lost a little flavour for the China trade deal
  • US House on Friday narrowly passed the new USD 3tln coronavirus stimulus relief bill. However, it is expected to be rejected in the Senate
  • BoE’s Haldane suggested the Bank was looking at options beyond and alongside negative rates
  • OPEC+ may reportedly extend its current production cuts to year-end, according to energy intel
  • Looking ahead, today's calendar sees a lack of tier 1 releases

CORONAVIRUS UPDATE

US President Trump said almost every state has taken steps to begin reopening and that he hopes to get a vaccine by year-end. President Trump also said China is buying a lot of US products and reiterated that the virus came from China and should have been stopped in China. Furthermore, President Trump commented that he has lost a little flavour for the China trade deal but separately noted 2021 will be a great year from an economic standpoint and that the US is ready to begin moving forward, while he tweeted the number of coronavirus cases is strongly trending downward throughout the US with few exceptions. (Newswires/Twitter)

US House on Friday narrowly passed the new USD 3tln coronavirus stimulus relief bill which was largely along party lines with the vote count at 208-199. (Newswires) However, it is worth noting that Republican Senators have branded the bill as “dead on arrival”.

US House Ways and Means Committee’s Brady said tax incentives that accelerate return of production lines to the US from China are a pretty smart thing to do and that payroll tax holiday is better than another round of direct cheques to Americans. (Fox)

Florida Governor said restaurants can operate at 50% capacity from next week, while theme parks (DIS, SIX, AMC) can submit their reopening plans. (Newswires)

Italy’s government approved the decree to lift some coronavirus-related restrictions beginning this Monday, while facilities such as gyms, swimming pools and sports centres will reopen from May 25th although travel between regions will remain banned until June 3rd. Elsewhere, Spanish PM Sanchez said they are seeking to extend its State of Emergency by 1 month to combat the coronavirus. (Newswires)

Germany’s confirmed coronavirus cases rose by 342 to a total of 174,355 and there were 21 additional deaths, according to reports citing the RKI Health Institute. (Newswires)

UK COVID-19 death toll rises to 34,636 (Prev. 34,446); deaths rise by 170 vs. Saturday’s 468. Case count rises by 3,142 vs. prev. 3,451 increase. (DHSC)

AstraZeneca (AZN LN) – If trials are successful, Co. will produce as many as 30mln COVID-19 vaccines available to the UK by September. Co. has also committed to delivering 100mln vaccine doses this year. Late-stage trials could be initiated by the middle of the year. (Newswires)

ASIA

Asia-Pac bourses mostly began the week with mild gains and US equity futures extended on their rebound as participants digested recent comments from Fed Chair Powell who continued to dismiss the prospect of negative rates but suggested the Fed was not out of ammunition and that further action may be required. ASX 200 (+1.3%) outperformed with the advances led by strength across mining names after gold prices rose above USD 1750/oz and WTI crude futures reclaimed the USD 30/bbl level. Nikkei 225 (+0.5%) was also higher but with gains capped following GDP data which was better than expected but still showed Japan’s economy moved into a recession. Hang Seng (+0.4%) and Shanghai Comp. (+0.6%) were kept afloat after Chinese officials pledged further support including PBoC Governor Yi Gang who reiterated that China will implement more powerful monetary policy and China’s Government Work Report draft also stressed the launching of stronger macro policies. However, the gains were limited by ongoing tensions following the US move to prevent Huawei from acquiring semiconductors and chipsets made using US technology, while India’s NIFTY (2.3%) failed to hold on to opening gains with sentiment pressured after India extended the lockdown again to May 31st and surpassed China in the number of coronavirus cases. Finally, 10yr JGBs were initially flat with price action kept lacklustre amid the gains in stocks, weak GDP data from Japan and with participants awaiting the 5yr JGB auction which resulted in firmer accepted prices and in turn spurred JGBs upon return from the lunch break.

PBoC skipped open market operations and were net neutral on the day. (Newswires) PBoC set USD/CNY mid-point at 7.1030 vs. Exp. 7.1036 (Prev. 7.0936)

Chinese House Prices (Apr) Y/Y 5.1% (Prev. 5.3%). (Newswires)

China Commerce Minister Zhong Shan said coronavirus caused a huge shock to China's economic and social developments but added they will boost domestic demand and promote consumption. Furthermore, Zhong stated that foreign demand has slumped significantly and China’s trade faces unprecedented challenges, while Chinese companies are having an extremely difficult time amid the outbreak. (Newswires)

US Secretary of State Pompeo stated that Beijing threatened to interfere with the work of journalists in Hong Kong which could affect US assessment of Hong Kong’s autonomy and status. (Newswires)

Japanese GDP (Q1 P) Q/Q -0.9% vs. Exp. -1.2% (Prev. -1.8%, Rev. -1.9%) Japanese GDP (Q1 P) Y/Y -3.4% vs. Exp. -4.6% (Prev. -7.1%, Rev. -7.3%) Japanese Economic Minister Nishimura said weakness in external and domestic demand underscores severe state of Japan's economy, while he suggested the economy is expected to slump significantly due to soft overseas demand amid the pandemic and noted that notes April and May have been severe. Nishimura also suggested that they are looking into additional policy measures and want a solid response in 2nd extra budget. (Newswires)

UK/EU

BoE’s Haldane suggested the Bank was looking at options beyond and alongside negative rates, while he noted there is more that can be done in the gilt side and corporate bond side of QE. (Telegraph)

The UK's Office for Budget Responsibility has conceded that the economy is likely to see a "slower recovery" from COVID-19 than initially anticipated. (Telegraph)

The EU is prepared to back down from its hard-line approach on fishing rights once EU leaders get involved in post-Brexit trade talks, according to senior sources in Brussels. (Times) UK has reportedly increased planning for a no-deal Brexit with senior government sources stating that the UK was preparing to walk away from discussions with Brussels in the next month unless the EU gives ground. (Times)

EU Commission Chief Gentiloni said the Commission will present its recovery fund proposal in the last week of May. There were also separate reports that senior EU officials said there was no agreement yet between EU countries on the proportion of grants vs loans in the new recovery fund and that some members were still opposed to grants. (Newswires)

Fitch affirmed France at AA; Outlook Revised to Negative from Stable and affirmed Austria at AA+: Outlook Revised to Stable from Positive, while S&P affirmed Netherlands at AAA; Outlook Stable. (Newswires)

FX

The DXY lacked firm direction with marginal weakness following the latest comments from Fed Chair Powell who suggested it will take a while to recover the lost GDP and that full confidence may not occur until there is a vaccine. EUR/USD traded rangebound in which prices consolidated above 1.0800 and GBP/USD was also uninspired but off the lows seen at the start of trade in which prices briefly fell below the 1.2100 handle after BoE’s Haldane suggested the bank was looking at a range of options including negative rates, and following a lack of progress in Brexit talks with both sides said to ramp up preparations of a no-deal. USD/JPY and JPY-crosses were mixed despite the mostly constructive risk tone, while antipodeans benefitted from their high-beta statuses and broad gains across the commodities complex.

SNB’s Maechler acknowledged the CHF’s appreciation, but stated it would have been much more pronounced if we hadn’t been prepared to intervene more heavily; when asked if 1.05 in EUR/CHF was being an informal upper limit responded ‘no, we look at the entire currency situation’. Additionally, rejected the possibility of a special profit payout from the SNB to the Swiss Gov’t given COVID-19. (Newswires/NZZ)

COMMODITIES

WTI June futures rallied above USD 30.00/bbl amid views of a faster rebalancing in the oil market and after recent reports that OPEC+ may extend production cuts until year-end, which has potentially made a repeat of last month’s negative price volatility less likely ahead of tomorrow’s June contract settlement. Elsewhere, gold prices extended on its rally amid a weaker greenback, while copper gained in tandem of positive risk tone and overnight strength in Chinese commodity prices which saw Dalian iron futures jump 4% at the open.

Baker Hughes US rig count: oil rigs -34 at 258, nat gas rigs -1 at 79, total rigs -35 at 339. (Newswires)

OPEC+ may reportedly extend its current production cuts to year-end, according to energy intel. (Twitter)

GEOPOLITICS

China’s Global Times Editor called for China to step up its nuclear weapons and deterrence in which he stated the US is very powerful and being unfriendly towards China, and that China needs enough capability so that US does not proactively attack China under any circumstances. (Twitter)

US

T-Notes ultimately sold off on Friday with the curve slightly steeper; 2s little changed while 10s and 30s up by a couple of bps. There had initially been a bid in the complex in European trade amid risk off conditions induced by the latest US/Huawei restriction headlines. However, as equity futures began to recoup losses shortly after the US cash equity open, duration came under pressure, reversing the gains from overnight. The move marks a slight paring of the strong bull-flattening seen through the record Treasury refunding auction this week and perhaps was part due to some position unwinding as we head into the weekend. Furthermore, the new USD 20bln 20-year auction looms on the horizon (scheduled for Wednesday), with Friday’s modest rate back-up perhaps some concession ahead of the new coupon for the market to digest. Note also that the Fed cut its daily USTs/TIPS purchases for the week ahead again - USD 6bln from 7bln – but the curve was little changed post the announcement. US T-note futures (M0) settled 3 ticks lower at 139-10+.

Fed Chair Powell reiterated the US will not have negative interest rates and post coronavirus recovery could last through 2021, while he added the Fed is not out of ammunition and can do more if needed in which he suggested there are no limits to what we can do. Powell added that projections of 20%-25% unemployment peak sounds about right but noted US not at risk of 2nd Great Depression, while he suggested that the Fed and Congress may have more to do to respond to economic fallout from pandemic. Furthermore, Powell stated that companies and families may need 3-6 months more of financial help to avoid insolvency and that the Fed can expand existing programmes or add to new ones, as well as increase purchases as required. (Newswires)

Fed Financial Stability Report said the financial sector faces "significant" vulnerabilities due to the pandemic, as businesses and households deal with fragile finances for the foreseeable future. Fed added that pandemic strains on household and business balance sheets likely created fragilities that could last for some time, while the banking sector could experience strains due to the economic and financial shocks. (Newswires)

NY Fed cut Treasuries/TIPS purchases to USD 6bln per day for the upcoming week (prev. USD 7bln). (Newswires)

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Does this mean we can ignore any draws from this week's energy inventories? https://t.co/Z6ScKbX7UV