Fear of new US lockdowns hurts risk sentiment

Rates

The dovish Fed meeting and risk aversion proved to be a good cocktail for core bonds. European stock markets ended up to 5% lower, while the profit taking move in the US shed up to 7% (Dow) from main indices. Experts warn that evidence of a second wave of infections was building in Arizona, Texas, Florida and California. US Treasury Secretary Mnuchin tried to sooth worries by saying that there wouldn't be a second shutdown, but that's not how local authorities are thinking. Houston-area officials are weighing a new lockdown. Another thing probably triggered the profit taking move is that talks over more fiscal stimulus will be postponed to late July. US Treasuries outperformed German Bunds. The US yield curve flattened with yield changes ranging between +3 bps (2-yr) and -10.4 bps (30-yr). The German yield curve bull flattened with yield falling by 3.4 bps (2-yr) to 8.9 bps (30-yr). 10-yr yield spread changes vs Germany widened by up to 4 bps.

Losses on Asian stock markets are relatively small (-2%) compared to yesterday's WS scare. US equity futures recover as well with core bonds returning some of yesterday's gains. Today's eco calendar only contains April EMU production data and June University of Michigan consumer confidence. National EMU data already showed the impact on production, so the -18.5% M/M consensus estimate shouldn't come as a surprise. The US confidence gauge is the first indication for the month of June after US eco data generally beat consensus in May after most states eased lockdown restrictions. It will be interesting, and possible market-sensitive, to see whether this momentum lasts early June. Overall, we continue to keep a close eye on stock markets though. We think that the threat of fresh lockdowns to fight the 2nd wave of infections will only rise, making stock markets prone for additional profit taking moves. Especially ahead of the weekend, we'd err on the side of caution, preferring core bonds. Yesterday's rumours that French President Macron could call for snap elections on Sunday to strengthen his mandate could play as well. Fresh French presidential elections could weaken the German-Franco European axis and interfere with the search for consensus on the EC's recovery fund proposal.

Technically, the US 10-yr yield returned in the April-May trading range. Adverse risk conditions could force a test of the lower bound around 0.56%. The German 10-yr yield turned south as well after failing to break sustainably above the -0.31%/-0.29% resistance area. First support stands around -0.50%.

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