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[PODCAST] EU Open Rundown 22nd May 2020

  • Asian indices weakened as markets digested today's key events including the BoJ off-schedule meeting and start of China's NPC
  • China omitted setting a GDP growth target for this year due to coronavirus, as well as uncertainties surrounding economy and trade
  • China's draft Hong Kong legislation stated that Hong Kong should finish enacting as soon as possible the regulations in basic law regarding national security
  • US Senators are reportedly introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong
  • BoJ announced new measure to boost lending to small and mid-sized businesses impacted by the coronavirus, as expected
  • RBI cut the Repurchase Rate by 40bps to 4.00% and Reverse Repo Rate by 40bps to 3.35% in an unscheduled meeting
  • Fed’s Clarida suggested that Yield Curve Control is a natural complement to calendar based forward guidance
  • US President Trump stated he will not close the country if a second coronavirus wave hits
  • Looking ahead, highlights include UK retail sales, ECB minutes, Chinese NPC meeting, ECB's Lane

CORONAVIRUS UPDATE

US COVID-19 cases rose 22,860 to 1,551,095 and the death toll rose 1397 to 93,061, while AFP tweeted there were 1255 deaths in US from coronavirus in 24 hours citing the Johns Hopkins tracker. (Newswires/AFP/Twitter)

US President Trump said there is a lot of firepower left from the Fed and Treasury for the economy and suggested now it is time to open the country again. President Trump added that he thinks the US will need more fiscal stimulus and that there could be one more nice shot of stimulus post coronavirus outbreak, while he stated he will not close the country if a second wave of virus hits. (Newswires)

US President said he met with Senate Majority Leader McConnell in which they are working on a package of very positive steps. There were also comments from US Senate Majority Leader McConnell that it is highly likely there will be another rescue package and it is important to incentivize people to work, while he added the Senate is in the same place as the White House and the next coronavirus stimulus package is not far off. (Newswires)

UK Health Minister Hancock said Optigene has made a 20-minute swab test which is currently being trialled and if successful, would be rolled out as fast as possible. He also stated that we are still some time away from a vaccine and have not yet decided whether any vaccine would be mandatory. (Newswires)

ASIA

Asian indices weakened as markets digested today's key events including the BoJ off-schedule meeting and start of China's NPC where it omitted setting a GDP growth target for this year due to the coronavirus pandemic, as well as uncertainties surrounding economy and trade. ASX 200 (-0.8%) declined with energy names pressured by an aggressive pullback in oil prices and with sentiment subdued after Fitch revised its outlook on Australia’s sovereign rating to negative from stable, while Nikkei 225 (-0.8%) suffered the ill-effects of a firmer currency despite the BoJ’s announcement of a new measure to boost lending to small and mid-sized businesses impacted by the coronavirus in which it set aside JPY 75tln for its new loan programme but which was widely anticipated. Hang Seng (-4.8%) and Shanghai Comp. (-1.3%) were lower amid the start of China’s Two Sessions conclave where the Government Work Report refrained from setting an economic growth target but pledged to reduce tax and fee burdens for companies by CNY 2.5tln this year and use several tools to keep liquidity ample. Furthermore, the losses in Hong Kong were exacerbated after China’s attempts to tighten its grip on the Special Administrative Region through a new national security law, and is likely to stoke further unrest for the region which had already been mired by months of protests since the middle of last year. Finally, 10yr JGBs were relatively uninspired with only mild upside seen despite the downbeat risk tone and upside in T-notes, while the conclusion of the BoJ’s emergency meeting and announcement of a new lending scheme also failed to spur any meaningful price action.

PBoC skipped open market operations and were net neutral on the day. (Newswires) PBoC set USD/CNY mid-point at 7.0939 vs. Exp. 7.0969 (Prev. 7.0868)

Chinese Premier Li announced the Government Work Report did not contain a GDP target for 2020 citing global pandemic and uncertainties for global economy and trade, but stated that China will make policy more flexible and will use policy tools such as open market operations, interest rate cut, RRR cut, re-lending and re-discount to keep liquidity reasonably ample. Furthermore, Li stated China is to issue CNY 1tln in special bonds this year and will cut tax and fee burdens for companies by CNY 2.5tln this year although noted China faces unprecedented risks and challenges. China also reiterated its intent to implement phase one of the trade deal with the US despite recent tensions between the two nations. (Newswires)

China's draft Hong Kong legislation stated that Hong Kong should finish enacting as soon as possible the regulations in basic law regarding national security. Furthermore, it stated that the Hong Kong government and legal bodies should prevent, stop and punish activities that endanger national security, while the bill is to allow China to set up an agency in Hong Kong to safeguard national security. (Newswires)

US President Trump responded that the US would have a very strong reaction if it happens, when asked about China's Hong Kong bill, In related news, US Senators are reportedly introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong, while the legislation also would penalise banks that do business with the entities. (Newswires/WSJ)

Hong Kong activists vow to take to the streets in protest against Beijing plans to impose launches a national security law which is seen as one of its fiercest assaults on Hong Kong's autonomy. (AFP/Twitter)

BoJ kept main policy settings unchanged as expected with NIRP maintained at -0.10% and the 10yr JGB yield target at around 0% through 8-1 vote, while it decided on a new loan scheme aimed at boosting lending to support small and mid-sized firms hit by the coronavirus with the programme worth JPY 75tln. BoJ added that the loans are to be conducted from June and it is to actively purchase ETD and REITS for the time being. (Newswires)

Japanese National CPI (Apr) Y/Y 0.1% vs. Exp. 0.2% (Prev. 0.4%). (Newswires) Japanese National CPI Ex. Fresh Food (Apr) Y/Y -0.2% vs. Exp. -0.1% (Prev. 0.4%) Japanese National CPI Ex. Fresh Food & Energy (Apr) Y/Y 0.2% vs. Exp. 0.5% (Prev. 0.6%)

RBI cut the Repurchase Rate by 40bps to 4.00% and Reverse Repo Rate by 40bps to 3.35% in an unscheduled meeting, while it is taking measures on debt relief, supporting trade and steps to ease constraints on state governments. Furthermore, it rolled over the SIBDI facility for another 90 days and Governor Das stated they will continue to be proactive and react to situations as and when it is warranted. (Newswires)

UK/EU

UK PM Johnson is reportedly seeking to end UK reliance on some Chinese imports. (Times)

UK GfK Consumer Confidence (May P) -34 (Prev. -33); lowest since February 2009. (Newswires)

FX

The DXY traded marginally higher and back above the 99.50 level as the negative risk tone spurred safe haven flows, while the plethora of Fed commentary also continued in which Fed Chair Powell suggested they will not rest until the economy is on the road to recovery but expects that to be soon. In addition, Vice Chair Clarida noted that actions so far are buying some time for the US economy and seemed to be advocating for Yield Curve Control which he suggested is a natural complement to calendar based forward guidance, while Fed’s Williams and Bostic both added to the recent rhetoric against negative rates. EUR/USD was subdued after the recent slip from resistance at 1.1000 and with participants looking ahead to the ECB Minutes later today, while GBP/USD remained choppy following the weakest GfK Consumer Confidence reading in over a decade. USD/JPY and JPY-crosses were underwhelmed by the BoJ’s widely anticipated announcement and due to the subdued risk tone which kept antipodeans in the lurch, with AUD/USD also hampered by the sovereign outlook cut by Fitch.

Fitch revised Australia’s Outlook from Stable to Negative, affirmed rating at AAA. (Newswires)

New Zealand Finance Minister Robertson said helicopter money is being discussed but not at a level where we have details how it will work, while he added they are keen to make sure fiscal policy remains with the government. (Newswires)

COMMODITIES

Commodities were subdued with crude prices with WTI crude futures the worst performers overnight due to the risk averse tone. This resulted to an aggressive pull back in oil prices that briefly pressured WTI crude futures to below the USD 31.00/bbl level, and although oil has since recovered off its lows, prices are still down over 5% heading into the European open. Elsewhere, gold was rangebound as the effects of a firmer greenback was counterbalanced by the risk averse tone, while copper prices declined as China concerns dictated overnight risk sentiment.

GEOPOLITICS

US President Trump said he has a good relationship with Russia, but it didn't adhere to the Open Skies treaty and that the US might make a deal with Russia on an arms strategy. There were also comments from an envoy that the US is prepared to spend Russia and China "into oblivion" in order to win a nuclear arms race although it wants to avoid that. (Newswires)

US

The TPLEX was little changed on Thursday, with ranges relatively tight; 2s and 10s anchored at 17bp and 67bp respectively. The T-note had seen some modest weakness heading into the US session as equity futures came off their lows, although soon strengthened again as US-China tensions hit risk appetite amid China moving ahead with its plans for a new Hong Kong security bill. Later in the afternoon, Fed Chair Clarida noted that some form of YCC, alongside forward guidance, was worth looking into (echoing the minutes), although the market reaction was muted. On the issuance front, the Treasury 10-year TIPS auction saw weak demand, tailing by 4bps, an indication of market participants not being concerned of inflation rising. On the corporate front, AT&T launched the fourth largest IG offering of the year, raising USD 12bln across five tranches (7s, 11s, 21s, 31s, 40s). T-note (M0) futures settled 0.5 ticks lower at 139-02.

Fed Chair Powell (Neutral) said downturn has been sudden and severe and suggested they will not rest until the economy is on road to recovery, although he expects that to be soon. (Newswires)

Fed's Clarida (Voter, Neutral) said actions so far are buying some time for the US economy through looser financial conditions and that the Fed will do more if necessary. Clarida also said they do not intend to return to Standard Economic Projections (SEP) at the June meeting but added the committee may return at some point to the discussion around the pace and composition of asset purchases. Furthermore, Clarida suggested that Yield Curve Control is a natural complement to calendar based forward guidance, while he added that other central banks are deploying YCC and it makes sense to be briefed on how it is working. (Newswires)

Fed's Bostic (Non-Voter, Dove) said he is not a fan of negative rates and there is still relief money available, while he added banks should be preserving as much capital as possible. (Newswires)

NEC Director Kudlow said the Fed has done a good job and agrees with Powell that we do not need negative rates, while he noted liquidity is more important. (Newswires)

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