Yesterday, global sentiment deteriorated further. High profile data illustrated the devastating impact of corona on the economy. The German economy contracted 10.1% Q/Q in Q2. The US economy contracted an unprecedented 32.9% QoQ, reported on an annualized basis. Aside from the negative impact on growth, data also suggest a deflationary impact. The data as such were no surprise. However, investors apparently ever more realize that the recovery won't be any kind of V-shaped as the number of infections is again rising, not only in the US but also in a growing number of regions in Europe and Asia, slowing the reopening of the economy. US initial jobless claims rising for a second week illustrated this risk of a slower recovery. Continuing claims also printed higher than expected. European equites lost up to 3.5%. US indices showed a mixed picture with the Dow losing 0.85% but the Nasdaq gaining 0.43% as investors awaited the results of Alphabet, Facebook, Apple an Amazon. Uncertainty on the economic outlook was very visible in the bond markets. Core US and German yields declined further. US yields declined 1.4 (2-y) to 2.9 bp (30-y). The US 10-y yield is breaking below the 0.54% level, the range bottom since April. German yields also nosedived further between -3.2 bp (2-y) and -5 bp (30-y), illustrating the run on safe haven assets. On the FX markets, it initially looked that the dollar could get some reprieve. The trade-weighted dollar tried a shy intraday rebound and EUR/USD ‘dropped' to the mid 1.17 area. However, a tweet of US president Trump raising the idea of delaying the elections was already enough to revive distrust in the US currency. EUR/USD easily breaking the 1.1822 technical level (62% retracement of the 2018 top to March 2020 low) only added to the USD negative momentum. EUR/USD closed at 1.1847. With no important data or other news, sterling again outperformed in technical trade. EUR/GBP closed at 0.9050.

After the close of the US markets, the US tech bellwethers reported strong results, lifting US equity futures. Question is whether that is a good barometer for global market sentiment. Part of the rise is also already undone in Asia this morning. Asian equites show a mixed picture with China slightly outperforming after the publication of a solid official PMI. On the other hand, Japanese equites are losing 2%+. In the meantime, the trends of declining US yields and the slide of the dollar continue. EUR/USD is nearing the 1.19 big figure. USD/JPY tumbled for the 104.75 area at start of trading to currently trade in the 104.25 area.

Later today, a first estimate of EMU Q2 GDP (expected -12.1% Q/Q) and EMU inflation will be published. In the US personal income and spending data and the Chicago PMI will be released. For now, it looks that the market is ever more joining the analysis of the Fed. Wednesday's Fed statement reads : the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.' In this respect, the further decline of core/US yields probably tells more on investors' view on the economic outlook rather than the performance of (some) equity indices. Yesterday's break lower in US yields was significant. The slide in US yields, also at the long end of the curve, recently proved a negative for the dollar. Risk-off currently doesn't help the US currency much. The technical picture of the USD deteriorated substantially after both the TW dollar (DXY) and EUR/USD decisively broke important support (DXY 94.65)/resistance (EUR/USD 1.1822). EUR/USD 1.2102 marks the next 76.% retracement level of the decline from the 2018 top.


News Headlines

The China government PMI's for July indicated that the recovery in the country remains on track. The composite PMI printed little changed at 54.1. The manufacturing PMI rose to 51.1. The services PMI eased slightly from 54.5 to 54.2, but holds at a lofty level.


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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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