Markets experienced a mild, corrective risk-off session on Friday

KBC Market Research Desk KBC Bank

Markets

Markets experienced a mild, corrective risk-off session on Friday. US market were closed for the Independence Day holiday, resulting in lower traded volumes across most markets. European equities opened little changed but gradually slipped in a corrective downtrend. EMU final June PMI's were upwardly revised but stayed in contraction territory (composite 48.5), with little direct impact on trading. Bloomberg reporting some disagreement within the ECB on the scope of the PEPP crisis program maybe was a source of caution. European equities closed with losses of around 1%. The Bund contract initially gained modestly on the risk off but couldn't hold the gains. European yields declined less than one bp. EUR/USD traded directionless roughly between 1.1220/50. EUR/GBP held a tight range in the low 0.90 area. An early ending to last week's EU-UK talks over the post-Brexit agreement didn't hurt sterling.

This morning, Asian markets are starting the week in risk-on modus with China strongly outperforming. Local state media this weekend gave positive comments on recent stock market rally indicating that the government sees a positive equity sentiment as supportive for the recovery. Chinese equity indices are rising >4%. A further record rise in global corona infections still doesn't hurt positive sentiment. US equity futures join the Asian risk rally and are gaining 1%+. The yuan strengthens with USD/CNY declining to the 7.05 area. The trade-weighted dollar is drifting below the 97 handle.

Today's calendar is moderately interesting with German factory orders and the May EMU retail sales. In the US the Markit Services PMI and the US non-manufacturing ISM are scheduled for release. Of late, sentiment indicators like the PMIs/ISM mostly came out better than expected despite the rise in worldwide infections, including in the US. As such, the data supported positive market sentiment and there is no reason to expect today's data to bring a different signal for global trading. Later this week, the calendar is rather thin with production data in several EMU countries and US PPI on Friday. The Reserve bank of Australia will hold a regular policy meeting tomorrow. The US Treasury will hold regular 3-y (Tuesday), 10-y (Wednesday) and 30-y (Thursday) auctions. Especially the 10-y and 30-y sale might influence the short-term dynamics on core bond markets. Of late, German and US 10-y yields drifted lower in established ranges. A positive risk sentiment and upcoming (US) supply might cause some temporary underperformance of US treasuries (modest rise in US LT yields). However, we don't expect the established ranges to be broken. On FX markets global sentiment still remains more important as a driver for global USD trading rather than interest rate differentials. A constructive sentiment supports EUR/USD. The 1.1160/1.12 area looks rather solid support. 1.1349 is a next reference on the technical charts. Sterling (EUR/GBP) was captured in a narrow range just north of 0.90 and the end of last week. According to press reports this weekend UK Fin Min Sunak might announced (limited) tax cuts this week. The UK and the EU restart negotiations on the post-Brexit relationship. With no concrete prospects of a breakthrough, the EUR/GBP 0.8950/0.90 might not be that easy to break for sterling.

News Headlines

Spain will probably extend its employee furlough scheme until the end of the year and possibly into 2021 for industries worst hit by the coronacrisis, including tourism, aviation and leisure sectors. Labour minister Díaz only recently extended the scheme, under which the state pays 70% of salaries of furloughed staff, until September. Some 2 million workers are currently covered.

ECB President Lagarde said the euro zone faces disinflationary or deflationary price pressures for about two years as the transition to more digitization, automation, shorter supply chains and greener industries materializes. Lagarde said the pandemic has accelerated this shift and hopes it will improve productivity which ultimately should trigger inflation dynamics.

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KBC Market Research Desk

KBC Bank

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