Resilience of risk rebound will be tested soon

After Monday’s significant risk rebound, it was back to normal yesterday. European stock markets managed a good start, but risk sentiment dwindled afterwards. The US fiscal shot is approved and discounted, but now it’s over to the economy. US stock markets tried to cling to Monday’s momentum as well, but returned most of the intraday gains in the final stages of trading. (LT) US bond yields rose in lockstep with this intraday equity decline, causing a steepening of the US yield curve. Daily changes in the US ranged between -4.3 bps (2-yr) and +5 bps (30-yr). The German yield curve bear steepened with yields rising 3.5 bps (2-yr) to 11.1 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by 3 to 8 bps with Greece (-17 bps) outperforming. The Eurogroup on Tuesday reached broad consensus to use the ESM’s firepower to grant credit lines to EMU countries in need. The ECB is also said to couple its unlimited buying programme OMT to those credit lines. Yesterday, nine EMU governments even made a statement, calling for joint debt issuance to finance the fight against the virus. Countries like Germany or the Netherlands are strongly opposed. EU Leaders will today normally hold a Summit via teleconference to decide on the issue.

Asian stock markets are mixed this morning with Japan underperforming (-4%). European and US equity futures trade with losses as well. Core bonds are slightly upwardly oriented. Today’s eco calendar is rather thin apart from the EU Summit. US weekly jobless claims will rise to astronomic levels and could be a wake-up call for those who believe we already turned the corner. With US monetary and fiscal stimulus now announced/in place, we’ll see how strong the resilience of the stock market bounce is. We continue to prefer to err on the side of caution. The length and severity of quarantine measures put in place will grind economies to a halt and probably longer than anticipated. For the corporate sector, this risks turning liquidity problems into solvency issues. The fall-out on the corporate sector is illustrated by the junking of Ford by Moody’s and S&P. Several other BBB-rates companies await a similar faith, throwing a huge amount of debt into junk.

From a technical point of view, the German 10-yr yield tested the upper band of the trading band since last Summer. The US 10-yr yield trades volatile, but still below the previous all-time low (2016), which is first resistance. For US yields, the Fed’s unlimited QE announcement is the de facto start of curve control. That implies that the mid-March Treasury sell-off in times of stress is less likely to see a repeat.

Download The Full Sunrise Market Commentary