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[PODCAST] EU Open Rundown 22nd June 2020

  • Asian equity markets began the week cautiously as sentiment was clouded by reports of increasing COVID-19 infections rates globally
  • WHO reported the largest singe-day increase of global infections, US cases rose above the 7-day average and Germany’s r-value stands at 2.88
  • The PBoC maintained its 1-year and 5-year Loan Prime Rates at 3.85% and 4.65% respectively as expected
  • DXY heads into the EU open softer, EUR/USD oscillates around 1.12 and GBP/USD is sub-1.24
  • UK Chancellor Sunak is reportedly planning an emergency VAT cut
  • Looking ahead, highlights include US existing home sales, EZ consumer confidence, ECB's de Guindos, Lane, Fed's Kashkari, BoC's Macklem

CORONAVIRUS UPDATE

WHO reported the largest single-day increase of coronavirus infections with 183,000 new cases. (AP/Twitter)

US CDC reported 32,411 new coronavirus cases for a total of 2,248,029 which is a 1.6% increase vs. Prev. 7-day average of 1.2% increase and the death toll rose by 560 to 110,625. Florida COVID-19 cases +3.7% vs. 7-day average 3.5%. (Newswires) 

AFP tweeted that US President Trump said on Saturday that he was encouraging administration health officials to slow down coronavirus testing in which he noted that increased testing leads to more cases being discovered. (Twitter)

White House Press Secretary said US President Trump has no plans to lift EU travel restrictions. In other news, Apple (AAPL) announced it is to close some stores in Florida and Arizona, as well as North and South Carolina amid a spike in COVID-19 cases, while it was also reported that cruise lines voluntarily suspended all trips out of US ports until September 15th, according to the trade group. (Newswires)

Germany coronavirus reproduction rate surged to 2.88 on Sunday from 1.79 the day before based on a 4-day average, while the 7-day average was 2.03. (Newswires) As a caveat to the update, RKI notes that the r-value "reacts sensitively to short-term changes in case numbers, such as those caused by individual outbreaks. This can lead to relatively large fluctuations, especially if the total number of new cases is small"

UK coronavirus death toll rose by 43 to 42,632, while zero fatalities were reported in London. (DHSC)

UK PM Johnson is to unveil latest lockdown easing plan and review regarding 2-metre rule on Tuesday and other reports noted that PM Johnson is set to announce a one metre plus rule for all venues including restaurants, pubs and schools which will be effective from July 4th. Furthermore, UK Health Secretary Hancock suggested customers may need to register when visiting pubs and restaurants, while it was separately reported that the UK government may announce foreign travel could resume from July 4th. (Newswires/Telegraph)

ASIA

Asian equity markets began the week cautiously as sentiment was clouded by reports of increasing COVID-19 infections rates globally in which the World Health Organization reported a record daily increase of 183k cases, while new cases in the US topped the 7-day average and Germany’s reproduction rate surged to 2.88 from 1.79. This initially pressured US equity futures at the open and also weighed on ASX 200 (+0.2%) and Nikkei 225 (Unch.), although US index futures have since fully recovered and Asia-Pac bourses also retraced their early declines with outperformance seen in commodity-related sectors, in particular Australia’s gold miners after the precious metal resumed its rally and broke above the USD 1750/oz level. Hang Seng (-0.6%) and Shanghai Comp. (+0.3%) were mixed with price action rangebound after the PBoC maintained its 1-year and 5-year Loan Prime Rates at 3.85% and 4.65% respectively as expected, while it also conducted a CNY 120bln net liquidity injection which was welcomed by mainland bourses. Furthermore, there were reports that China is planning to step up purchases of US farm goods following recent discussions and that President Trump deferred sanctions on Chinese officials related to Uighur minorities as it may impact the US-China trade deal, although Hong Kong lagged after the release of the draft Hong Kong National Security Law which the Standing Committee of the NPC is speculated to enact when it meets on June 28th-30th. Finally, 10yr JGB traded subdued as the intraday recovery in Japanese stocks weighed on bond prices but with downside also cushioned by the BoJ’s presence in the market for over JPY 1tln of JGBs with 1yr-10yr maturities and with the Japan Securities Dealers Association noting regional banks bought a record amount of ultra-long JGBs last month.

PBoC injected CNY 40bln via 7-day reverse repos and CNY 80bln via 14-day reverse repos for a daily net injection of CNY 120bln, while the 7-day and 14-day reverse repo rates maintained at 2.20% and 2.35% respectively. (Newswires) PBoC set USD/CNY mid-point at 7.0865 vs. Exp. 7.0868 (Prev. 7.0913)

PBoC 1-Year Loan Prime Rate 3.85% vs. Exp. 3.85% (Prev. 3.85%) PBoC 5-Year Loan Prime Rate 4.65% vs. Exp. 4.65% (Prev. 4.65%)

China released draft Hong Kong Security Law and will set up a national security office in Hong Kong to collect, analyze and deal with criminal cases related to national security, while reports added that Hong Kong police and courts will maintain their jurisdiction although Chinese authorities would have the ability to exercise jurisdiction regarding some cases under specific circumstances. Furthermore, it was also reported that the Standing Committee of the NPC will meet June 28th-30th where it is speculated to enact the Hong Kong Security Law. (Newswires/Xinhua)

US President Trump said during an interview on Friday that he deferred sanctions on Chinese officials regarding Xinjiang mass detention camps as it may impact the US-China trade deal. (Axios)

Huawei is reportedly set to win UK government approval to build a GBP 400mln research centre to develop chip technology in the UK. (Sunday Times)

UK/EU

UK Chancellor Sunak is reportedly planning an emergency VAT cut and has instructed officials to prepare options for lowering VAT such as a reduction in the headline VAT and zero rate on more products for a specified period. (Telegraph)

UK Business Minister Sharma said the government will change the law to allow scrutiny regarding certain foreign takeovers to ensure they do not pose a threat to UK’s ability to tackle a public health emergency. (Newswires)

UK police declared a stabbing attack in a park in Reading, UK which killed 3 as a terrorism incident. Police named the attacker as 25-year old Libyan refugee Khairi Saadallah who was under the radar of security services last year although no action was taken as there was no genuine threat or immediate risk discovered. (Guardian)

ECB’s Weidmann commented that Germany’s economy had passed the worst of the pandemic crisis and is now anticipated to recover gradually. (Frankfurter Allgemeine Sonntagszeitung)

A German Constitutional court judge-designate is upbeat on the prospects that a solution can be found regarding the dispute over the ECB’s bond buying program. (Newswires)

Italy PM Conte said the government is concerned about consumer spending which remains weak and that a sales tax cut is an option government discussed although it costly and no decision has been made yet. PM Conte also stated that the approaching week will be important for a decision regarding a sales tax reduction and that a single ultra-broadband network, digital payments and energy transition are priorities for the government to boost the economy. Furthermore, he stated support measures will likely require higher than planned deficit spending and that the government will not wait until September for measures to avert job losses and support the tourism industry. (Newswires)

EU sources said there would be no joint communique between the EU and China this year. (SCMP)

FX

The DXY reversed some of the initial safe-haven driven flows observed at the start of the session to consolidate around 97.50, with early upside also restricted by the higher pace of COVID-19 cases, as well as recent gloomy Fed commentary including Fed Chair Powell who stated the path ahead for the US economy is likely to be challenging and Fed’s Kashkari suggested the recovery will take longer than anticipated a few months ago. The lacklustre mood for the greenback helped its major counterparts in which EUR/USD re-approached the 1.1200 handle as it nursed some of the weakness seen last Friday after the EU Summit failed to reach an agreement on the recovery fund as expected. GBP/USD also attempted to recoup lost ground after having slumped to its weakest in about 3 weeks, although the pair is off its lows as focus turns to reopening efforts with UK PM Johnson said to unveil the latest lockdown easing plan on Tuesday including a “one metre plus” rule and with Chancellor Sunak planning an emergency VAT cut. Elsewhere, price action in USD/JPY and JPY-crosses reflected the flimsy but positive risk appetite and antipodeans marginally benefitted from the mildly improved risk tone, with NZD/USD also gaining ahead of this week’s RBNZ meeting in which OIS price in around 99.7% probability for the OCR to be maintained at 0.25% and the New Zealand Shadow Board reiterated the view that it favours further QE rather than a negative official cash rate.

COMMODITIES

Baker Hughes US rig count Oil -10 at 189, Nat Gas -3 at 75, Total -13 at 266. (Newswires)

Commodities were mixed in which the WTI crude futures August contract mirrored the choppy intraday risk appetite before marginally pulling back from the USD 40/bbl level and now heads into the European open relatively flat, while light pertinent news flow also ensured relatively uneventful trade ahead of today’s July contract expiry. Elsewhere, gold extended on gains to climb back above the USD 1750/oz level as the precious metal benefitted from the lacklustre greenback and copper edged marginally higher as risk sentiment gradually improved and as in its largest buyer China was kept afloat following PBoC liquidity efforts.  

GEOPOLITICS 

North Korea reportedly continues to deploy troops to border sentry posts for bush clearance and road maintenance, while South Korea does not see this yet as a sign of imminent military action. There were also separate reports that North Korea made 12mln leaflets against South Korea which it plans to send through 3000 balloons, while US and South Korean top nuclear envoys are said to share the gravity of the situation regarding the increased tensions in the Korean Peninsula. (Newswires/Yonhap)

US President Trump suggested he's had second thoughts regarding the decision to recognize Juan Guaidó as Venezuela's leader and said he is open to meeting with Venezuela's Maduro but added at this point, he has turned them down. (Axios)

US

Yields were little changed by settlement as latter session risk aversion saw the curve’s bear-steepening unwind; 2s at 19bps, 10s at 70bps and 30s at 147bps. Duration had been under pressure in the pre-market as equity bourses grinded higher into the open, with the much-touted Quad Witching seeing little market reaction. However, after Apple updated that it would be re-shutting stores in certain US states, both yields and equity futures dipped lower as concerns grew on the US reopening narrative that has been seen as a key tailwind for an economic recovery. Note the Fed also carried out over USD 12bln of purchases in the 0-2.25yr Treasury sector today, the largest purchase operation in a while, although had little effect on the curve, with the 2-year stubbornly anchored around the 20bps region. Meanwhile in credit, Eldorado (ERI) and Caesars (CZR) priced their USD 6.2bln M&A bond today, bring weekly HY issuance to an all-time high, marking another record for wider credit markets after the Fed followed through with the announcement of its individual bond purchases (SMCCF) on Monday, “because we said we would,” Powell reminded as credit ETFs (LQD) hit all-time highs. US T-note futures (U0) settled 1+ tick lower at 138-25.

Fed Chair Powell said path ahead for the US economy is likely to be challenging which will take time and work. (Newswires)

Fed Vice Chair Clarida (voter, neutral) said there is no limit to the Fed's purchases of Treasuries or MBS and that the Fed is a long way from its goals, while he added that there is more the Fed can and will do. Clarida also stated that the Fed does not see bubbles forming from bond purchases but is attuned to risks and that the Fed is not thinking about lowering its 2% inflation target. (Newswires)

Fed's Kashkari (voter, dove) said the recovery will take longer than anticipated a few months ago and that policymakers must understand disparities in the labour market to reach full employment. Furthermore, Kashkari suggested that capping additional government wage assistance at prior level of wages may eliminate the disincentive to return to work and his base case is that the US will see a 'second wave' in the Autumn. (Newswires)

US President Trump suggested that new restrictions on visa will be announced today which could impact an estimated 240,000 people across various sectors but noted there will be very few exclusions. (Fox)

Moody’s affirmed US sovereign rating at AAA; Outlook Stable. (Newswires)

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😴😴😴 That is us done for the week. Wishing all you rascals across the pond a great Independence Day! Meanwhile, f… https://t.co/SdJYlrxqbh