Weak economic activity in the Eurozone dragged on bond yields and the euro, while upbeat company earnings led the S&P to a new record high.

More signs of weakness in Germany: Ifo business climate in April fell for the seventh month (99.2, consensus 99.8, previous 99.7), suggesting the German economy continued to lose steam. In China, meanwhile, the PBOC injected 267.4 billion yuan through a targeted medium-term lending facility in order to foster credit expansion which, in turn, decreases the possibility of a reserve ratio requirement (RRR) cut in the short-term.

The ECB assessed the impact of a trade war in the economy, suggesting that higher import tariffs and trade barriers would hurt US GDP more than that of China and the Eurozone, as other nations to switch from US goods to those of China or the Eurozone’s. ECB’s conclusions differ from those of the IMF, which expects the trade war to hurt China more than the US.

China injected USD39.8bn of funds into the banking system via the targeted medium-term facility (TMLF) to encourage loans to small and private firms. The move reflects ongoing efforts to support credit expansion while trying to avoid a build up of further financial bubble. That said, today's move has sparked speculation that PBOC may be moving away from aggressive accommodation, although many analysts still expect PBOC to cut RRR in 2H19. As per calculations, the net long term liquidity provided to the banking system through today's TMLF is at RMB 110 bn after accounting for past MLF funding that was not rolled over last week. The upshot is that compared to last year's 250 bps in RRR cuts, PBOC is expected to be less accommodative in 2019 as it remains vigilant of financial stability risks, particularly from the housing market.

Meanwhile, bond prices rose with sovereign yields declining sharply across the board, led by the German bund, which returned to negative levels, after economic activity failed to gain any ground. In Spain, risk premium slightly widened, although the government reduced net issuances by 5bn to EUR 30bn in 2019.

In FX markets, the euro slightly depreciated on the back of weak activity data, while dollar strength weighed on emerging market currencies, especially in those countries with higher vulnerability.

European stocks declined, except the DAX index, which inching up slightly led by positive earnings result in the information and technology sector. Meanwhile, the European banking sector underperformed, dragged down by the lack of dynamism in economic activity, and low interest rates. In addition, comments from the ECB’s Coeuré downplaying the need to offset the side-effects of negative interest on the banking sector may also have hindered the banking sector. In Asia, the Chinese market got little help from the liquidity injection in the Chinese banking system, amid concerns that PBOC may be moving away from aggressive accommodation. In the US, upbeat company earnings led the S&P to a new record high.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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