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[PODCAST] US Open Rundown 16th June 2020

  • Sentiment is firmer this morning following the positive APAC lead which was bolstered by a draft US infrastructure plan; US futures are off highs, but are still over 1% firmer on the session
  • US President Trump administration is working on a draft plan for USD 1tln infrastructure proposal to stimulate the economy
  • North Korea demolished the inter-Korean joint liaison office & separately, Indian soldiers have reportedly been killed after a clash with Chinese soldiers
  • BoJ kept policy settings unchanged but noted the size of market operations and lending facilities to address the pandemic is likely to increase to around JPY 110tln
  • IEA Oil Market Report increased 2020 oil demand forecast by nearly 500k BPD given demand from China & India during lockdown
  • EU Antitrust regulators are to investigate Apple (AAPL) terms and conditions for using Apple Pay on iPhones & iPads
  • Looking ahead, highlights include US retail sales, industrial production, Fed Chair Powell testimony, Fed's Clarida

CORONAVIRUS UPDATE

Reports note Texas cases rose 1.4% vs. Prev. 7-day average of 2.3%. (Newswires)

Institute for Health Metrics and Evaluation (IHME) raised US COVID-19 death forecast to 201,129 from 169,890 by October 1st and raised Florida death forecast by 186% to 18,675 from 6,559. (Newswires)

NEC Director Kudlow said there is no intention of even thinking about a second shutdown and that COVID trends are not worrisome at this point, while he sees a 'steep V' shaped recovery. (Newswires)

China Global Times tweeted that Beijing has no possibility of becoming a second Wuhan despite new infection and that excessive restrictions which would hinder the economic recovery are not necessary, citing an expert. (Global Times)

Beijing locked down 7 compounds in central Xicheng district to contain coronavirus outbreak and closed 11 food markets, as well as sanitized 276. It was also reported that 3 highway terminuses have stopped bus services into Beijing and Shanghai is to quarantine all people from mid- to high-risk areas in China for 14 days. (Newswires)

GLOBAL

IMF’s Managing Director Georgieva says the IMF will be downgrading its outlook for ‘the majority of countries’, but some nations such as Germany are performing better than originally anticipated. Additionally, warned that the Fund may not have enough current resources to assist in the event of a second-wave of COVID-19. (Sky News) Note, the next IMF Update is typically released in July and the second 2020 World Economic Outlook will be published in October

ASIA

Asia-Pac bourses notched considerable gains as the region took impetus from Wall Street's recovery after the pace of infections slowed in key US states and the Fed announced its Secondary Market Corporate Credit Facility will begin purchasing corporate bonds. ASX 200 (+3.9%) and Nikkei 225 (+4.9%) surged from the open with energy and tech leading the firms gains in Australia and Viva Energy the biggest gaining stock following its guidance, while stocks in Tokyo also rallied as they coat-tailed on the recent favourable currency moves and with focus on the BoJ announcement in which the central bank kept policy settings unchanged as expected but noted the size of market operations and lending facilities to address the pandemic is likely to increase to around JPY 110tln from the current JPY 75tln. Hang Seng (+2.4%) and Shanghai Comp. (+1.4%) were also positive amid some moderation in the US-China related headlines with the US to permit Chinese carriers to continue to operate 4 flights from China per week and with the US to also allow companies to work with Huawei to develop 5G standards despite its blacklisting, although gains for the mainland were relatively reserved compared to its peers after the PBoC’s net liquidity drain. Finally, 10yr JGBs were lower in which they briefly fell below the 152.00 level amid spill over selling from USTs and as stock markets surged, while the losses in bonds also followed the BoJ decision to maintain its monetary policy settings as expected.

PBoC skipped reverse repo operations for a net daily drain of CNY 60bln. (Newswires) PBoC set USD/CNY mid-point at 7.0755 vs. Exp. 7.0769 (Prev. 7.0902)

US Department of Transport said it is to permit Chinese carriers to continue to operate 4 flights from China per week, while US government is to continue to press for complete restoration of air travel between US and China. (Newswires)

BoJ maintained policy setting as expected with rates kept at -0.10% and 10yr JGB yield target at around 0% in which the decision on YCC was made by 8-1 with Kataoka the dissenter. BoJ added that the size of money pumped out through market operations and lending facilities will likely increase to JPY 110tln from current JPY 75tln and that it will take additional monetary easing steps without hesitation if needed with close eye on pandemic. Furthermore, the BoJ stated exports and output are falling sharply with the economy in a severe state but added it will likely improve as fallout from the virus subsides. (Newswires)

US

Fed announced a proposal to expand its main street lending program to include access to credit for non-profit organizations in which the rates, deferral of principle and interest payments, as well as 5-year term will be the same as for main street business loans. Fed added that each non-profit must meet thresholds and must be a tax-exempt organization, while the Fed is seeking public comment by June 22nd regarding the proposal. (Newswires)

Fed's Bostic (non-voter, dove) said he expects unemployment at about 10% in Q4 and sees need for further fiscal support, while he added that the Fed needs to meet its dual mandate before raising rates. (Newswires)

US President Trump administration is working on a draft plan for USD 1tln infrastructure proposal to stimulate the economy which would focus on 5G and rural broadband, although reports added it would still under discussion and would need the backing of congress. (Newswires)

Des Moines/Mediacom Iowa poll showed US President Trump leading former VP Biden at 44% vs. 43% in a poll of 674 likely voters taken June 7th-10th with a margin of error at +/- 3.8 points. (Twitter)

UK/EU

Brussels is reportedly preparing to back down regarding fishing and admit that EU fleets do not have automatic rights to fish in UK waters. (The Times)

UK ILO Unemployment Rate* (Apr) 3.9% vs. Exp. 4.7% (Prev. 3.9%)

-        Average Earnings (Ex-Bonus)* (Apr) 1.7% vs. Exp. 1.9% (Prev. 2.7%)

-        Employment Change (Apr) 6k vs. Exp. -83k (Prev. 211k)

-        Claimant Count Unemployment Change (May) 528k vs. Exp. 400.0k (Prev. 856.5k)

German ZEW Economic Sentiment (Jun) 63.4 vs. Exp. 60.0 (Prev. 51.0)

German ZEW Current Conditions (Jun) -83.1 vs. Exp. -84.0 (Prev. -93.5)

-        ZEW says there is growing confidence that the economy will bottom-out by summer this year; Financial market experts continue to expect only a slow increase in economic value in Q3 and Q4

GEOPOLITICS

North Korea is mulling plan to enter demilitarized zones and its army is preparing to implement government orders, according to North Korea state media. In related news, South Korean President Moon called on North Korea to not stop the peace journey despite some troubles. (Yonhap/Newswires)

Subsequently, South Korean Ministry of Unification has confirmed that North Korea demolished the inter-Korean joint liaison office, NK News; after reports of an explosion/smoke from Kaesong in North Korea near the border. Given this, South Korea's Blue House says Seoul will "strongly respond" if North Korea further worsens the situation (Yonhap/NK News/Newswires)

Indian Army Colonel and 2 Army jawans killed in action during a clash with Chinese troops at one of the standoff points in the Galwan Valley, Ladakh, India Today Senior Editor Aroor; after reports of fresh tensions at standoff points in Easter Ladakh at Pangong Tso/Galwan, according to The Hindu's Peri. Some reports note that Indian soldiers attacked Chinese soldiers at the border (Twitter/The Hindu/India Today). Thereafter, the Global Times reported that the Chinese Foreign Ministry said that China and India have agreed to resolve bilateral issues through dialogue to ease the border situation and maintain peace and tranquillity in border areas. More recently, the Chinese Global Times editor tweeted “China also suffered casualties in the Galwan Valley in the physical clashes with Indian soldiers, China doesn’t want to have a clash with India, but we don’t fear it”. (Twitter)

EQUITIES

European equities drift lower as trade is underway, but the region remains in firm positive territory [Euro Stoxx 50 +2.4%] despite the slew of geopolitical developments in early EU hours including further souring in inter-Korean relations alongside clashes between nuclear powers India and China. Some participants point yesterday’s recovery to the recent Fed decision to directly purchase corporate bonds, but scepticism remains regarding the stock market “shrugging off” stacking negative fundamentals and rising uncertainty – with the latest BofA June Fund Manager survey also noting that a record 98% of investors say the stock market is the most overvalued since 1998. Nonetheless, broad-based gains are seen across Europe of some 2%, whilst sectors also point to risk appetite in the market as cyclicals outpace defensives. In sectoral breakdown mimics the “risk-on” sentiment as Material, Banks and Travel & Leisure stand as the top performers, whilst Health, Retail and Media lag. In terms of individual movers, the strong performance in the Travel sector sees Carnival (+8.8%), easyJet (+7.3%), IAG (+7.7%) and Tui (+6.7%)  leading the gains – with the latter also noting that the easing of travel restrictions allows the group to partially restart its summer 2020 programme. Ashtead (+7.0%) trimmed earlier gains but holds a spot among the leaders following its trading update. Commerzbank (+2.5%) is unfazed by the spat with its second largest shareholder Cerberus, who recently stated the German bank has not executed or embraced any actions put forward by Cerberus.

EU Antitrust regulators are to investigate Apple (AAPL) terms and conditions for using Apple Pay on iPhones & iPads, regulators are to investigate alleged access restrictions to Apple pay for rival products; to investigate the Apple Store rule mandating use of their own purchase system. (Newswires)

FX

USD - The DXY is trying to form a base around 96.500 following its late reversal through the 97.000 level on Monday when flagging risk sentiment due to heighted 2nd wave coronavirus fears was given a double boost by the Fed announcing individual corporate bond buying under the SMCCF program and US President Trump’s admin working on a draft proposal for a Usd 1tn infrastructure bill. However, subsequent flare ups on the Korean border, between China and India, Saudi Arabia and the Houthis, Iran and the US, have sapped momentum from riskier assets like stocks and the Dollar has reclaimed some of its losses as a result along with similar rebounds in fellow safe havens. Ahead, US retail sales and ip data before Fed chair Powell’s Senate testimony.

GBP - Aside from the broader upturn in risk appetite, Sterling has received an independent boost via latest Brexit news as the Times reports that the EU may be ready to back down on fishing rights rather than somewhat inconclusive UK labour and earnings data. Indeed, Cable is holding relatively firmly above 1.2600 and Eur/Gbp is back down below 0.9000, albeit the former off best levels close to 1.2690 and the 200 DMA (1.2692) and the latter rebounding from a dip under 0.8950.

EUR/AUD/CHF/CAD - All moderately firmer against the Greenback, with the Euro reclaiming 1.1300+ status and eclipsing a couple of HMAs (100 and 200) on the way up to around 1.1350, and maintaining gains after an encouraging ZEW survey, while the Aussie has retained a grip on the 0.6900 handle in wake of RBA minutes reaffirming an on hold stance with a bias to do more if needed. Elsewhere, the Franc remains above 0.9500, but flattish vs the Euro either side of 1.0750 following a modest Swiss Government GDP forecast upgrade, though still predicting a deep 2020 contraction and the trough in Q2, while the Loonie is meandering between 1.3510-1.3600 parameters amidst consolidation in oil prices off recent lows as the IEA raises its global demand estimate by nearly 500k bpd for this year.

JPY/NZD/SEK - Marginal G10 underperformers with the Yen pivoting 107.50 vs the Buck after the BoJ left key policy metrics unchanged as expected, but increased COVID-19 lending by Jpy 35 tln, the Kiwi relinquishing 0.6500 ahead of NZ Q1 current account balances and the Swedish Crown ruffled by the Swedish Labour Board lifting its 2020 jobless forecast appreciably and the Riksbank reporting a deterioration in bond market functioning to leave Eur/Sek elevated above 10.5000.

EM - No surprise to see pressure on the Krw beyond 1210 vs the Usd in light of North Korea destroying the Inter-Korean joint liaison office, according to South Korea’s Ministry of Unification, but regional currencies in general are jittery, bar the Zar and Mxn that have reversed some of Monday’s declines to revisit resistance ahead of psychological/round number levels at 17.0000 and 22.0000 respectively.

RBA Minutes from June 2nd Meeting affirmed the target for 3yr yields would be maintained and the central bank will also not increase the cash rate until progress was made on its employment and inflation targets. The minutes stated that members recognized the global economy was in a severe downturn and that the Australian economy was experiencing its largest contraction since the 1930s, while it is prepared to scale up bond purchases if needed but also noted it had only purchased government bonds only on one occasion since the prior meeting. Furthermore, members noted yields on bonds with 1-2 years to maturity had risen to be a few basis points higher than the yields on 3-year bonds and if this should continue, they would consider purchasing bonds in the secondary market to ensure that these short-term yields are consistent with the target for three-year yields. (Newswires)

FIXED

Core bonds are still acknowledging the much improved risk tone compared to yesterday when weekend COVID-19 case counts and record rises in some US states jangled 2nd wave nerves, but Bunds, Gilts and US Treasuries are retaining an element of safe-haven premium amidst heightened geopolitical angst in several hot-spots. Hence, the respective 10 year benchmarks are all off lows (174.90, 136.80 and 138-09) after staging firmer bounces towards Monday’s closing levels at 175.39, 137.03 and 138-20 before the US open and a busy pm agenda including potentially pivotal data (retail sales and ip), Fed chair Powell’s appearance in front of the Senate Banking Committee and Clarida ahead of API crude/product inventory updates.

COMMODITIES

WTI and Brent front month futures continue to grind higher since the European cash open as participants digest a string of geopolitical headlines alongside the IEA monthly oil market report. Firstly, tensions ramped up in the Korean Peninsula after North Korea destroyed the inter-Korean liaison office, as well as a standoff between nuclear powers India and China in which a number of soldiers lost their lives in the clash – which China blames India for instigating. Meanwhile, the IEA raised its 2020 global oil demand growth forecast by 500k BPD amid demand from China and India. 2021 oil demand is forecast to rise by 5.7mln BPD, which remains below 2019 levels. Furthermore, the agency does not expect demand to return to pre-crisis levels until at least 2022. This is in stark contrast to the EIA STEO report last week which downgraded its respective 2020 global demand forecast by 120k BPD. The two reports, however, synchronise on the view that US crude is set to fall this year: the IEA expects a decline of 900k BPD and the EIA a fall of 670k BPD.  WTI July gains a firmer footing above USD 37/bbl (vs. 36.38/bbl low) whilst its Brent Aug prices extends above USD 40/bbl (vs. 38.95/bbl low). Next up in terms of scheduled events, traders will be eyeing the weekly Private Inventory data for a glimpse at crude stocks over the last week. Further head, the JTC will be convening tomorrow ahead of the JMMC meeting on Thursday. Spot gold meanwhile retains an underlying bid above USD 1730/oz amid the aforementioned developments in the geopolitical sphere ahead of Fed Chair Powell’s testimony, albeit the statement is unlikely to divert much from the FOMC script, but the Q&A section of the event will garner attention. Copper prices meanwhile track stocks higher but found resistance at USD 2.625/lb as the red metal remains within Friday’s range.

IEA Oil Market Report: 2020 oil demand forecast increased by nearly 500k BPD given demand from China & India during lockdown

-        2021: Oil demand to increase by 5.7mln BPD, which will still be lower than 2019 levels

-        Oil demand will not fully recover until at least 2022

-        US oil supply set to fall by 900k BPD in 2020, and another 300k BPD in 2021 unless prices rise

-        Global oil supply declined by 11.8mln BPD in May, as OPEC+ countries reduced output by 9.4mln BPD

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