China and Hong Kong Pressures are Having Limited Knock-on Effects

The spill-over into today’s activity has been minor. The heightened tensions weighed on China and Hong Kong markets, but Japan, South Korea, Taiwan, and Indian equity markets rose.

Europe’s Dow Jones Stoxx 600 is higher for the third consecutive session, the longest streak this month. US shares are also trading higher, and the S&P 500 looks poised to rechallenge yesterday’s high, leaving yesterday’s opening gap unfilled. Benchmark bond yields are a little lower, and the US 10-year is hovering around 68 bp.

The greenback is bid against most of the major and emerging market currencies. Among the majors, the yen, the Canadian dollar, and New Zealand dollar are steady to higher, while the European complex, led by the Swiss franc, is nursing small losses. Turkey, Hungary, and South Africa led the losers among emerging market currencies.

The Chinese yuan (onshore and offshore) fell to its lowest level of the year. Gold drifted to two-week lows a little above $1700, while July WTI is consolidating in $33.50-$34.30 range as Russia seems to be balking at extending the maximum output cuts beyond next month.

Asia Pacific

President Trump is threatening “very interesting” action against China by the end of the week. Apparently, under consideration are a new set of sanctions against officials, businesses, and financial firms over the effort to crack down on dissent in Hong Kong.

There are actions the US could take, including limiting transactions and freezing assets. The US could suspend Hong Kong’s special trade privileges, but this seems potentially too disruptive for US companies and would punish Hong Kong more than China. Meanwhile, demonstrations and conflict with police have escalated in Hong Kong.

Pressure on the Hong Kong dollar is evident in the forward market. The 12-month forward points increased by almost 60 to 670. A week ago, they stood at 256. The 3-month forward points increased by almost 20 today to about 167. A week ago, they stood at 75.

Separately, the PBOC set the dollar’s reference rate at CNY7.1092, while the bank models implied CNY7.1144. However, the dollar rose to almost CNY7.1630 to approach the CNY7.1850 peak last September. The dollar rose to almost CNH7.1770 against the offshore yuan. It peaked last September near CNH7.1965. Chinese officials do not appear to cause the yuan’s weakness but are not resisting it forcefully.

Separately, China reported a 4.3% decline in April industrial profits, almost a third of the decline that the median forecasts in the Bloomberg survey anticipated and what seems like an improvement after the nearly 35% decline in Q1. However, the performance of the state-owned enterprises suggests a more complicated picture. Profits in this sector fell 46% in the January to April period, a little worse than the 45.5% decline reported in Q1.

Nevertheless, with the latest reserve requirement cuts for large banks, and additional efforts for small and medium businesses, and signs of more fiscal support coming from the National People’s Congress, China is stepping up economic and financial efforts. At the same time, Japan’s cabinet has approved a JPY117 trillion supplemental budget with JPY72.7 trillion of fiscal outlays. South Korea is expected to deliver another 25 bp rate cut tomorrow (bringing the seven-day repo rate to 50 bp).

For the sixth consecutive session, the dollar stuck on the JPY107-handle. It has not traded below JPY107.30 since May 18. It neared JPY108 yesterday but backed off. Today there are $1.7 bln in options in the JPY107.80-JPY107.90 area that expire. If that is not a sufficient cap, there is another billion-dollar option at JPY108.15 that will also be cut. The Australian dollar is in a narrow range below yesterday’s high near $0.6675. There is an option for nearly A$635 mln at $0.6650 that expires today.


The European Commission appears to be combining the German-French proposal with the other proposal by Austria, Sweden, Denmark, and the Netherlands to advance a 750 bln euro fiscal support effort. It would include 500 bln euro in grants and 250 bln euros in loans.

It seems a popular meme to see an EU bond as a step toward the mutualization of debt and a fiscal union. This seems exaggerated. There are already common obligations, such as bonds issued by the European Stabilization Mechanism and the European Investment Bank. The EU itself has issued bonds in the past.

ECB President Lagarde is laying the foundation for an increase in the central bank’s Pandemic Emergency Purchase Program next week. She cautioned today that the more mild scenario that had been considered was out of date and that the more likely scenario is the one that anticipates an 8-12% contraction this year.

The internal debate seems to be over relaxing more of the self-imposed limits. The capital key has already been diluted for PEPP, and the issue limit of 1/3 has also been waved. There does not seem to be much interest in taking rates deeper into negative territory.

There has been much discussion of the Bank of England adopting negative rates. We have understood officials to be keeping that option on the table, which may help lower UK rates, such as last week’s 3-year Gilt auction that resulted in a negative yield.

However, it does not seem to be imminent. More likely, the Bank of England will increase its bond purchases when it meets on June 18. The BOE’s chief economist, Haldane’s comments, were consistent with the idea that other policy options will be explored before negative rates.

The euro initially slipped to almost $1.0930 after stalling in front of $1.10 yesterday. However, with a running start in the European morning, the euro punched above $1.10 and above last week’s high to poke above the 200-day moving average (~$1.1015) for the first time since the end of March.

The $1.1050 area may hold some offers, but there is little chart-based resistance ahead of $1.1160-$1.1200. Sterling, on the other hand, is firm but through late in the London morning, has been unable to surpass yesterday’s high near $1.2365. The next target above there is around $1.2425.


The US reports the May Richmond Fed survey and the Fed’s Beige Book for ahead of next month’s FOMC meeting. Nearly every survey (diffusion indices and sentiment surveys) have shown some moderation in the weakness since in April. The improvement has also mostly been better than expected. And yesterday’s it was reported that April new home sales, which were forecast to have imploded by nearly a quarter, eked out a small (0.6%) gain.

Yes, there is little doubt that the world’s biggest economy has suffered a large hit in this quarter, but the data suggests ideas of a Q3 recovered may not be misplaced. Other data, including traffic patterns, are also pointing to a slight pick up in activity as the lockdowns ease. Canada and Mexico’s calendars are light today. Banxico issues its inflation report today, and coupled with the strength of the peso may spur speculation of another 50 bp rate cut at its next meeting.

Although Fed officials have played down the likelihood of negative rate policy in the US and the fed funds futures curve is not implying negative rates, the central bank may not be done. There is more virtual ink being devoted to the possibility of yield curve control, where the Fed would not target a certain amount of Treasuries to be bought, as it is now ($5 bln a day down from $75 bln a day at the peak) but to target another rate.

The Bank of Japan targets the 10-year yield, and the Reserve Bank of Australia targets the three-year yield. If the Fed adopts such a tool, it would more likely target a short or intermediate coupon such as something between a two- and five-year maturity. It would help steepen the curve and send a signal that rates will remain low for some time.

The Canadian dollar joined the Australian dollar in breaking out of its recent range. The US dollar fell below the lower end of its two-month range against the Canadian dollar near CAD1.3850 yesterday. The losses are being extended today. The break of CAD1.38 is important from a technical perspective as it coincided with the halfway mark of this year’s range.

The next retracement objective is near CAD1.3600. More immediately, a bid in the European morning was found near CAD1.3730. The old support near CAD1.38 now offers resistance. The greenback is also pushing below the halfway mark of this year’s range against the Mexican peso (~MXN22.15). A break of MXN22 would set the sights on the MXN21.00-MXN21.10 area. Mexico is reporting a record increase in virus cases and related fatalities. The peso’s strength largely reflects the broader risk-on mood.

For a look at all of today’s economic events, check out our economic calendar.

Risk Assets Rally Amid Pandemic Recovery Optimism

Positive coronavirus vaccine news and indications that global economies are slowly reopening helped to buoy investor mood.

American biotech company Novavax Inc. (NVAX) announced on Monday that it has started the first human trials of its experimental coronavirus vaccine. Results of the clinical trial are anticipated in July 2020.

Novavax CEO Stanley C. Erck stated: “Administering our vaccine in the first participants of this clinical trial is a significant achievement, bringing us one step closer toward addressing the fundamental need for a vaccine in the fight against the global Covid‑19 pandemic”. Last week, biotech Moderna announced that its experimental vaccine appears to be safe and able to stimulate an immune response against COVID-19.

Data from Johns Hopkins University indicates that coronavirus COVID-19 global cases have risen to 5,499,535 with 346,326 fatalities. In the hard hit United States over 98,000 people have lost their lives due to the coronavirus and more than 1.6 million have been infected. Nevertheless, all 50 states are beginning to reopen in some way.

Meanwhile, US/China tensions simmer and continue to dampen risk appetite. White House national security adviser Robert O’Brien warned on Sunday that the United States will likely sanction China if plans for new national security laws in Hong Kong are carried out.

Speaking on NBC’s Meet the Press, O’Brien stated: “It looks like, with this national security law, they’re going to basically take over Hong Kong and if they do … Secretary (of State Mike) Pompeo will likely be unable to certify that Hong Kong maintains a high degree of autonomy and if that happens there will be sanctions that will be imposed on Hong Kong and China.”

Looking at the AUD/USD daily chart we can see that the pair has reached its highest levels since March 9th. Resistance sits overhead at the 200 period simple moving average (SMA), while rising trendline support lies beneath.

For a look at all of today’s economic events, check out our economic calendar.

Dan Blystone, Scandinavian Capital Markets

Fear is Still on Holiday

Equity markets have rebounded strongly. Nearly all the equity markets in the Asia Pacific region rose (India was a laggard) led by an almost 3% rally in Australia, which was seen as particularly vulnerable to the Sino-American fissure.

The Nikkei is approaching its 200-day moving average as it reached the best level since March 5. Europe’s Dow Jones Stoxx 600 is up around 1% after a 1.5% gain yesterday. It is at its best level since March 10.

The S&P 500 is set to gap sharply higher, above 3000, and its 200-day moving average for the first time since March 5. Benchmark 10-year bond yields are mostly firmer (US ~70 bp), but peripheral yields in Europe are softer, which is also consistent with the risk-on mood. Germany sold a two-year bond today with a yield of minus 66 bp and saw the strongest bid-cover in 13 years.

The dollar is heavy. Among the majors, the Antipodean and Norwegian krone lead the way. The yen is least favored and is struggling to gain in the softer dollar environment. Emerging market currencies are higher, led by more than 1% gains by the Mexican peso, South African rand, and Polish zloty. Gold is consolidating at softer levels (~$1725-$1735), while oil prices continue to recover. July WTI is probing the recent highs around $34 a barrel.

Asia Pacific

The risk-on mood has not been sparked by any sign of a thaw in the US-Chinese tensions. Indeed, the PBOC set the dollar’s reference rate against the yuan a little higher than the bank models suggested (CNY7.1293 vs. CNY7.1277). It was the second successive fix that was the highest since 2008. Still, the yuan snapped a three-day decline and rose less than 0.1%.

Legislation that makes it easier to crack down on dissent pressured Hong Kong, where the stock market fell more than 5.5% before the weekend, and forward points for the Hong Kong dollar exploded. The Hang Seng stabilized yesterday and gained more than 1.8% today. The 3-month and 12-month forward points are more than double what they were a week ago, but have eased from the extreme readings before the weekend. The situation is far from resolved despite the market moves.

The focus in Japan is on the government’s second supplementary budget for nearly JPY1 trillion. It could be approved by the Cabinet as early as tomorrow and would nearly double the government’s efforts. Japan is lifting the national state of emergency.

The dollar is firm against the yen but held just short of JPY108.00 (last week’s high was ~JPY108.10). There is an option for a little more than $400 mln struck at JPY107.90 that expires today. The market looks poised to challenge the highs in North America today. Note that the 200-day moving average is found near JPY108.35, and the greenback has not traded above it since mid-April.

The Australian dollar is punching above $0.6600 and is at its best level since March 9. Its 200-day moving average is found near $0.6660. The dollar peaked against the Chinese yuan at the end of last week near CNY7.1437. It rose against the offshore yuan on the same day near CNH7.1646, just below the high set on March 19.


The EU responded to Germany’s proposal to take at least a 20% equity stake (~9 bln euros) in Lufthansa by requiring it to give up some slots at airports in Frankfurt and Munich. Meanwhile, the larger focus is on the EC’s proposal for a recovery plan now that the German-French proposal has been countered by Austria, Denmark, Sweden, and the Netherlands.

However, the basis for a compromise does appear to exist in the form of some combination of grants, loans, and guarantees and in terms of access. With the European Stabilization Mechanism and the European Investment Bank issuing bonds for which there is a collective responsibility, we are not convinced that an EU bond is a step toward mutualization of existing debt or a fiscal union. In fact, such claims do little more than antagonize the opposition.

The ECB’s Pandemic Emergency Purchase Program (PEPP) has spent a little more than a quarter of its 750 bln euro facility in the first two months. Hints from some officials suggest that this could be expanded as early as next week when the ECB meets. At the current pace, PEPP will be out of funds toward the end of Q3 or early Q4. Talk in the market is that a 250-500 bln euro expansion is possible.

The political controversy of UK’s Cummings violation of the lockdown seems to have little impact for investors. Sterling, the worst performing of the major currencies this month, is bouncing back smartly today, and while the UK stock market was closed yesterday, it is playing a little catch-up today. The benchmark 10-year Gilt yield is a few basis points higher, but faring better than German Bunds and French bonds (where the 10-year yield is now back into positive territory, albeit slightly).

The euro has bounced a full cent from yesterday’s low near $1.0875. The market has its sights on last week’s high just shy of $1.1010 and the 200-day moving average a little above there. The euro has not traded above its 200-day moving average since the end of March. Above there, the $1.1065 area corresponds to about the middle of this year’s range. Sterling is near its best level in a couple of weeks.

After finding support near $1.2160 in the past two sessions, it bounced to about $1.2325 today to toy with the 20-day moving average (~$1.2315). The short-covering rally has stretched the intraday technical readings, and it may be difficult for the North American session to extend the gains very much before some consolidation.


The US reports some April data (Chicago Fed’s National Economic Activity Index) and new home sales. The reports typically are not market-movers even in the best of times. Moreover, it is fully taken on board that the economy was still imploding. May data is more interesting. The Dallas Fed’s manufacturing survey and the Conference Board’s consumer confidence surveys will attract more attention and are expected to be consistent with other survey data suggesting the pace of decline is moderating. This is thought to be setting the stage for a recovery in H2.

Canada’s economic diary is light today, and Mexico is expected to confirm that Q1 GDP contracted by 1.6%. Yesterday Mexico surprised by with a nearly $3.1 bln trade April deficit. The median forecast in the Bloomberg survey was for a $2 bln trade surplus. Apparently, none of the economists surveyed expected a deficit. Exports fell by nearly 41%, and imports tumbled by 30.5%. Many economists are revising forecast for Mexico’s GDP lower toward a double-digit contraction this year.

Nevertheless, the peso is flying. It is the strongest currency here in May. The 1.75% gain today brings the month’s advance to a dramatic 9%+ gain. The US dollar is near MXN22.10, giving back about half of this year’s appreciation. A break of the MXN22.00 area would target the MXN21.30 area.

The intraday momentum indicators are stretched. The US dollar is heavy against the Canadian dollar as well. It is approaching the lower end of its two-month trading range near CAD1.3850. The next important chart point is around CAD1.3800. Here too, the greenback’s slide in Asia and Europe is leaving intraday technicals indicators stretched as North American dealers resume their posts.

For a look at all of today’s economic events, check out our economic calendar.

Alibaba to Enjoy Double Boost this Week?

Should China’s largest e-commerce player offer a hopeful outlook guidance over its post-lockdown recovery, that could compel its shares to advance further, following gains earlier this week on news that Alibaba could be added to the Hang Seng index in August. The official entry into the city’s benchmark stock index could attract some HK$5 billion (US$650 million) of passive fund inflows towards Alibaba.

Due to the forward-nature looking of the markets, Monday’s announcement enabled Alibaba’s shares to break out of its slump, breaching the downward trend line seen over the past four months.

Looking ahead to Friday, market participants are already pricing in more volatility as the earnings announcement looms closer. The options markets show traders expecting an implied 1-day move of 4.84 percent around the release date, which is higher than the average of 3.58 percent price swing over the past 22 earnings announcements, according to Bloomberg data. A 4.84 percent move to the upside from Tuesday’s closing price would bring Alibaba’s shares to within one percent of its highest close on record, and allow it to catch up with gains seen in the S&P 500 and Nasdaq since the March 23 low.

Coronavirus tug-of-war

When Alibaba unveils its January-March performance figures after Hong Kong markets close and before the US opens for the final trading day of the week, shareholders will be assessing whether the overall drop in disposable income levels will offset the projected rise in online sales during the lockdown. In other words, how well did Alibaba’s over 700 million annual active consumers fare during the quarantine, a period which also disrupted customers’ livelihoods, merchant operations, and logistics.

Keep in mind also that China was the first major economy to emerge from the coronavirus-induced lockdown, after a Q1 GDP contraction of 6.8 percent year-on-year, its first negative reading since records were first published in 1992. Retail sales for the quarter saw a minus 19 percent print compared to the same period in 2019. However, online sales of physical goods during those three months grew 5.9 percent on an on-year basis.

Investors will be eager to find out how such top line figures filtered into Alibaba’s performance in the final quarter of its fiscal year. At the time of writing, markets are expecting a 14 percent rise in revenue with a 13 percent year-on-year decline in profit, with the one billion Chinese Yuan (US$141 million) in subsidies offered to offset the anticipated drop in spending likely weighing on the company’s bottom line.

Kill, or be killed

Alibaba is also seen as a bellwether of the post-pandemic recovery for global e-commerce players, and its guidance for the coming quarters should have major say on its near-term stock performance. Over the longer term, the company is seeking to further diversify its earnings base, from expanding aggressively into the Southeast Asian market, to investing heavily into other units such as cloud computing and digital entertainment which have yet to positively contribute to its operating income.

Chairman and CEO, Daniel Zhang has already pledged to “kill” its existing business with cannibalistic ventures, and it remains to see whether such risky yet innovative investments will pay off. Until then, Alibaba’s fortunes remain very much reliant on core commerce, which has contributed over 85 percent of total revenue over the last three fiscal quarters.

Written on 05/20/20 07:00 GMT by Han Tan, Market Analyst at FXTM

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Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis

The Federal Reserve announced that they were ready to support the stock market and provide backup for financial institutions that might encounter difficulties.

The big day arrived and, other than an occasional glitch that seemed to be unrelated to the heightened global fears, the birth of the new century was pretty much uneventful. Overall, the markets remained relatively quiet. However, trouble was still brewing.

The hyper-bullish technology stock sector was about to reverse its nearly decade-long run to unsupportable and overly optimistic highs. At the center of the hype and fascination were new companies, headed by twenty-something geniuses. They were referred to as startups.

The multiples of earnings that normally applied in order to assess value of these companies was thrown aside. That is because most of them did not have any earnings.

Nevertheless, they were attractive enough to garner huge crowds of support.  Just the hint of a revolutionary idea could boost an unknown, small private company into the spotlight of the new issue market with oversubscription being commonplace.

Technology stocks collapsed in 2000 and were eventually joined by the broader stock market which began a two-year descent that saw the S&P 500 lose fifty percent of its value.

With sugar daddy Fed at the helm, prices recovered. Then, in 2006-07, real estate prices peaked and cratered. Most of the obvious damage was in residential real estate.

Foreclosures were rampant and an entire cross-section of the population was in transit, moving from their recently acquired new homes and into rentals if they could find one.

Economic fallout spread to major investment banks and the stock market. Financial institutions with household names like Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG were skewered.

The stock market finally recognized how bad things were. Beginning in August 2007, and continuing for the next eighteen months, stock prices declined with a vengeance. The overall market, as reflected by the S&P 500, lost nearly two-thirds of its value.

In February 2009, a bottom was reached. The past ten years has seen the market surge to new all-time highs, seemingly much higher than could have possibly been anticipated just a few years ago. All of it has come with ‘help’ from the Fed.

In the most recent example of huge volatility and financial turmoil, the stock market dropped by one-third in three short weeks. It was worse than the initial crash of the stock market in 1929.

Some say that fear and economic dislocation due to the COVID-19 pandemic was the culprit. I don’t think so. All asset prices were artificially elevated due to previous Fed reflation efforts. A lack of fundamental underpinnings had left the stock market extremely vulnerable to a selloff of considerable magnitude, regardless of the specific trigger event.

Notwithstanding their broken record of bailouts, lower interest rates, and credit expansion, the Fed responded similarly again.

It was not exactly an about-face. After a half-hearted attempt to return interest rates to more normal levels, the Fed had already begun lowering interest rates incrementally.

Several years ago, the Fed began raising interest rates because they were concerned that continued easing could again trigger huge declines in the US dollar. On the other hand, raising rates raised the possibility that the system would not tolerate the restrictions well enough to get better, and another collapse might ensue.

The collapse came anyway. If you think it doesn’t matter what the Fed does anymore, you might be correct.

The Federal Reserve doesn’t know what to do. That’s too bad. For all of us.
The bigger problem is that it probably doesn’t make much difference what they do – or don’t do.” (see The Fed’s Dilemma)

Almost all Federal Reserve activity is comprised of reactions to problems that resulted from their own actions. And it has been that way ever since the Fed opened for business in 1913. (see Federal Reserve – Conspiracy Or Not?)

Over the course of the last century, the Federal Reserve has destroyed the value of our money. The U.S. dollar today is worth less than 2 cents compared to its purchasing power in 1913, when the Fed began its life on earth. This is a direct result of the inflation which the Fed creates continually by expanding the supply of money and credit.

Their initial attempt at controlling the financial markets ushered in the most severe depression in our country’s history beginning with the stock market crash in 1929. Former Fed chairman, Ben S. Bernanke agrees:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago Chicago, Illinois November 8, 2002

Promises, promises. Six years after his speech, Governor Bernanke presided over absolute catastrophe in the financial markets. Cheap credit and ‘monopoly’ money had blown bubbles in the debt markets that popped.

The beat goes on. Federal Reserve policy and actions are an abuse of fundamental economics. The effects of their actions are hugely volatile and unpredictable. Their actions and effects have spawned problems that are nearly insurmountable.

Knowing these things doesn’t help much. The Fed can only react to the same news and headline statistics that we all see and hear.

Fed policy, special funding efforts, infinite money, and credit creation – all of them combined may temporarily appease the dragon; but they will never slay it.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Optimism Burns Eternal

There was strong follow-through in the Asia Pacific region, where most markets advanced by more than 1% today. However, the bloom came off the rose, so to speak, in Europe. After a higher opening, markets reversed lower, and the Dow Jones Stoxx 600 is off about 0.75% in late morning turnover. All the major sectors are lower, led by utilities and industrials.

The US 10-year yield closed yesterday at 72 bp, its highest in a month, and sent Asia Pacific yields higher. However, the German-French proposal and ideas that the ECB will likely increase its bond purchases saw peripheral yields fall more than core rates.

The US 10-year yield is also a little softer. The risk appetites were expressed as a weaker US dollar, yen, and Swiss franc, while high-beta dollar-bloc currencies and Scandis jumped, and this has continued today. The JP Morgan Emerging Market Currency Index rose by nearly 1% and is up another 0.2% today and is at new highs for the month.

Gold reached $1765.4 yesterday before stabilizing, and today it is consolidating around $1726-$1740. Oil is also consolidating after yesterday’s surge. The July WTI contract reached $33 yesterday. It bottomed in late April a little above $17. It is trading today between $31 and $33 a barrel.

Asia Pacific

China is adding pressure on Australia. Even though Beijing has not formally linked its actions against Australian barley and beef as retaliation for its calls for an investigation into Covid-19 and the wet markets, there is little doubt about the subtext.

China is threatening to widen the trade dispute, and reports suggest it could extend to other products, such as wine, seafood, and oatmeal. On the other hand, Australia is the largest producer of iron ore, and Chinese demand has lifted prices to eight-month highs. Brazil, the second-largest producer, is being hobbled by a surge in virus cases and is now the world’s third-largest hotspot. Still, China’s apparent willingness to disrupt trade, as it has with Canada over Huawei, is unsettling.

The Bank of Japan’s next scheduled meeting is on June 18, but officials signaled an emergency meeting at the end of this week. The ostensible purpose is not to adjust monetary policy itself. Instead, it is expected to unveil a new program to support small businesses. The central bank left its bond-program unchanged today and stepping into the market to buy JPY1.2 bln of ETFs and REITs.

The dollar has been confined to about a 30-pip range against the yen below JPY107.60. For the sixth session, it has been limited to the range set on May 11 (~JPY106.40-JPY107.75). There are options for $1.5 bln that expire today between JPY107.65 and JPY107.75 and a $640 mln option at JPY107.35 that will also be cut today.

Just when the Australian dollar looked to be (finally) rolling over, with its first close below the 20-day moving average in a month before the weekend, it jumped up yesterday, and the follow-through buying today is testing recent highs. The late April high was set near $0.6570, and today’s high is just below. The intraday technicals suggest consolidation is likely. The PBOC set the dollar’s reference rate a little higher than the bank models suggested.

The dollar remained above CNY7.10 for the second session, which had been seen as the upper end of the acceptable range. We had thought that ahead of the National’s People Congress later this week, officials would have wanted a more stable yuan exchange rate. Meanwhile, tomorrow, the Loan Prime Rate is set, and more than 75% in a Reuters poll expect the one and five-year rate to be unchanged at 3.85% and 4.65%, respectively.


It has been up to the individual European countries to respond to the virus. The federal or joint effort has been limited largely to the ECB. However, that will change in the coming weeks as the EU prepares to respond. Yet, that is a point in itself, the level is not the monetary union but the larger group of 27. The vehicle is the EU’s budget seven-year financial framework that has been a bone of contention even before the pandemic.

Germany and France jointly proposed a 500 bln joint borrowing as part of the EU budget that will be used to help spur economic recovery. Germany and France envisioned grants, while several countries want loans. The funds would be raised by the EU and available based on need, while the repayment will be according to the share of the EU budget (tied to the size of an economy).

The ultimate EU effort will likely be larger than these funds, which still require agreement among the members. Last month the EC suggested a 2 trillion-euro packaged that included 320 bln euro borrowing. Its proposal included grants, loans, and guarantees. Investors liked what they saw, and Italian bonds rallied strongly.

The 10-year yield fell 19 bp, the most since late March, and the premium over German narrowed to below 215 bp for the first time in a month. The French 10-year yield rose a couple of basis points, less than the (~six basis-point) increase in the German Bund yield, despite Fitch’s cut in the outlook to negative before the weekend.

The UK reported jobless claims surged by 856.5k in April, while the claimant count rate rose to 5.8% from 3.5% in March and 3.4% at the end of 2019. Those working but experiencing an income loss qualify. The average weekly earnings (2.4% vs. 2.8%) and unemployment rate (3.9% vs. 4.0%) are March readings. Separately, while in trade talks with the EU, the US, and Japan, the UK unveiled a new post-Brexit tariff schedule. Some items like dishwashers and freezers will enter the UK duty-free next year. A 10% tariff will remain on cars, and duties will still be levied on agriculture goods.

The German ZEW survey was mixed. The current assessment deteriorated to a new low of -93.5 (from -91.5). However, the expectations component soared to 51.0 from 28.2. This is its highest level in five years. The IFO survey and the PMI, both due later this week, are seen as more important soft economic reports.

The euro is extending yesterday’s rally, which was the largest in a month, and the first push above $1.09 since May 4. The high from May 1, when Europe was on holiday, was near $1.1020, and that area is the next target, and the 200-day moving average is found there as well. The euro has not traded above it since late March. The intraday technical readings, however, are stretched, and initial support is seen near $1.0920. Sterling recovered smartly yesterday.

After falling to almost $1.2075, its lowest level since late March, sterling rebounded to nearly $1.2230 yesterday and reached almost $1.2270 today. The gain is notable too because another MPC member (Tenreyro) weighed on on the negative interest rate debate and claimed it was a powerful transmission mechanism with a positive impact on some EU countries. An option for nearly GBP430 mln is set at $1.23 rolls off today. As is the case with the euro, sterling’s gains through the European morning have stretched the intraday technical readings, cautioning against chasing it immediately higher.


An experimental vaccine by Moderno, the US biotech firm, showed some promise in a small first study to spur an immune system response to the novel coronavirus. The innovation here appears to be stimulating one’s own body to generate the spike protein that, like Covid-19, which ideally triggers the creation of antibodies. This helped lift sentiment. On the other hand, President Trump has given the World Health Organization 30-day for “major substantive improvements,” or America’s temporary funding freeze will become permanent.

NASDAQ reportedly will tighten its rules for IPOs that will make it more difficult for small Chinese companies to list. The listing of many Chinese companies on US exchanges has come under greater scrutiny recently. While the need for reform is clear, in the current setting, it is seen as part of the larger US campaign against China.

The US reports April housing starts and permits. At issue is the magnitude of the decline, and expectations are for a drop of 20-25%. It is the May survey data that, like the Empire State survey and University of Michigan consumer sentiment, that may show the first signs that a bottom was reached. Still ahead this week are the Philly Fed survey and preliminary PMI.

Separately, Treasury Secretary Mnuchin and Fed Chairman Powell will testify remotely before the Senate Banking Committee, and their prepared remarks have already been released. The takeaway is that although more steps may be taken, the economic recovery is expected to begin in Q3.

Canada and Mexico’s economic calendars are light today. The US dollar tested this month’s low near CAD1.3900 earlier day to extend yesterday’s loss that began from a little above CAD1.4100. The downside momentum appears to be stalling, and initial resistance is seen in the CAD1.3970-CAD1.4000 area. The greenback is also consolidating yesterday’s losses against the Mexican peso. Yesterday, it had fallen to its lowest level since mid-April near MXN23.45. The next support area is seen in the MXN23.25-MXN23.35 band.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

EUR/USD Stuck Inside Flat

The US Federal Reserve Chairman Jerome Powell spoke earlier this morning and said that the country’s GDP might lose up to 30% in the second quarter of 2020, while the Unemployment Rate is expected to reach 25%. At the same time, he believes that such huge negative numbers won’t result in a protracted crisis, because the country’s economy gets a lot of support from all angles.

The US government is planning to support households and the economy for a long time, from 3 to 6 months according to Powell, to help them overcome the consequences of the Covid-19 pandemic. Actually, this support might as well continue until the end of the year.

The US economy is expected to recover slowly – no one says anything about upsurge because the country’s population will need time to regain its feet. For the American Dollar, this news is moderately negative.

In the H4 chart, after completing the correction at 1.0836, EUR/USD is forming another descending wave towards 1.0777. Possibly, the pair may break this level and then continue forming the third descending wave to reach 1.0700. Later, the market may correct to return to 1.0777 for a test from below and then resume trading inside the downtrend with the target at 1.0600. From the technical point of view, this scenario is confirmed by MACD Oscillator: its signal line is moving below 0. Considering that the market may yet continue downtrend, the line also expected to continue moving downwards.

Изображение выглядит как текст, карта

Автоматически созданное описание

As we can see in the H1 chart, the pair has completed the descending impulse at 1.0803 along with the correction towards 1.0827. Possibly, today the price may fall to return to 1.0803 and break it to the downside. After that, the instrument may form a new descending structure with the target at 1.0777. From the technical point of view, this scenario is confirmed by Stochastic Oscillator: its signal line is moving to break 80 and may continue falling to reach 50. Later, the line may break 50 as well, thus boosting the price chart decline.

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Автоматически созданное описание

By Dmitriy Gurkovskiy, Chief Analyst at RoboForex


Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboForex shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

Central and Eastern Europe: Monetary Policy is easing Covid-19 Capital Market Disruption

“The capacity to implement bond-buying programmes and interest-rate cuts by central banks has varied considerably across the Central and Eastern Europe (CEE) region, while government borrowing rates have risen in some countries with elevated external-sector and public-finance risks alongside observation of sizeable portfolio outflows,” says Levon Kameryan, an analyst at Scope and author of a new report on CEE capital markets developments.

Overall, in the case of euro area CEE countries, low borrowing rates and investors’ relatively sanguine sovereign risk assessments reflect actions undertaken by the ECB – notably the large-scale asset-purchase programmes – in addition to the euro’s reserve-currency status. 10-year yields for euro area CEE governments increased only modestly so far in 2020 at currently around 0.6% for Slovakia and Slovenia, and below 0.3% in the case of the three Baltic states.

Monetary easing in non-euro EU CEE has abetted fiscal stimulus programmes

Among non-euro area EU CEE, large-scale fiscal stimulus packages in Poland, the Czech Republic and Hungary are backed by central bank policy responses that mitigate the tightening in financial conditions. Quantitative easing by the countries’ central banks might amount to as much as 10% of GDP in the case of Poland and 3% of GDP for Hungary.

The National Bank of Poland also reduced its reference rate by 50bps twice this year to 0.5% effective from April. The Czech central bank, on the other hand, has not announced quantitative easing so far, but has reduced its benchmark two-week repo rate three times to 0.25% by early May, from 2.25% in February. Hungary’s local-currency 10-year yield has reverted to January levels at 1.9% at time of the writing, after picking up to 3.3% mid-March. On the other hand, Czech and Polish yields of 0.8% and 1.3% respectively are currently somewhat lower than they were in January pre-crisis.

In the region, Romania, however, has less room for a bolder policy response due to elevated exchange-rate risk given a high proportion of foreign-currency public- and private-sector borrowing, as captured in Scope’s BBB-/Negative ratings for Romania.

The Romanian central bank cut its policy rate by 50bps to 2% in March and started its first-ever QE programme in April, although the size is modest. The central bank is unlikely to make further aggressive interest rate cuts that would risk weakening the value of the leu. Romania’s local currency 10-year government bond yield had increased to 4.4% at the time of the writing, from 4.1% as of January lows despite the policy rate cut, reflecting the country’s weak public finances, exacerbated by higher spending triggered by the 2020 crisis.

Severe external risk in Turkey

External risks in Turkey are further exacerbated by economic mismanagement, with real interest rates in negative territory after incremental rate cuts, which have amplified weakness in the exchange rate. The Turkish lira is currently trading around 10% lower against the dollar and 7% weaker against euro compared with end-February. Turkey’s 10-year lira government borrowing rates have increased sharply in 2020, to 13.3% at time of writing, from January lows of under 10%, despite cuts of 250bps in central bank policy rates over the same time period.

Additional fiscal measures and rate cuts forthcoming in Russia

In contrast, Russia’s fiscal stimulus has so far been modest, with additional fiscal measures and interest rate cuts likely to be forthcoming given its substantial liquid reserves (National Wealth Fund assets of 11.3% of GDP) and policy space. Direct purchase of government bonds on the secondary market is not expected to be on the central bank’s agenda, but longer-term repo funding of banks to support such purchases is possible.

Russia’s 10-year yield fell to 5.4%, supported by monetary easing, after picking up to over 8% mid-March, when Brent crude oil prices fell below USD 30 a barrel.

Russia’s reserves cover almost five times outstanding short-term external debt and support the external resilience of the Russian economy. On the other hand, Turkey’s official reserves cover only about 70% of short-term external debt, which poses a significant risk of a deeper balance-of-payment crisis if lira depreciation gets worse.

Read more in the rating agency’s report on CEE markets

Levon Kameryan is an Analyst in Public Finance at Scope Ratings GmbH.

What do the Charts say about Risk Appetites?

Decreased appetites for risk, illustrated by losses in the major equity benchmarks, seemed to have played a role. Sterling fell every day last week to reach its lowest level since late March ahead of the weekend.

While there was discussion of the possibility of negative rates in the US, the UK two-year yield has remained below zero for the past three sessions. New Zealand, which explicitly played up the possibility of negative policy rates, while doubling its bond-buying, saw its currency slump the most of the majors, losing about 2.7%. At the same time, UK talks with the EU are not going well, and without an extension, which Prime Minister Johnson rejects, it is difficult to see how significant disruptions will be avoided.

On the one hand, interest rates will remain low for a long time, and, for many investors, there is not much of an alternative to equities, and there appears to be plenty of cash on the sidelines.

On the other hand, the extreme left-hand tail risk that was palpable in March has been reduced by aggressive central bank and government action. Still, a meaningful recovery appears to some time off and more economic pain, in terms of business failures and supply chain disruptions. At the same time, the tensions between the US and China are ratcheting higher, and it has tended to curb risk-appetites in the past.

Dollar Index

A 99.00-101.00 range has contained the Dollar Index since the end of March with a few downside breaks that proved false. It pushed toward the upper end of the range last week, reaching its best level since April 24, roughly 100.55. With the pullback ahead of the weekend, it finished about 0.4% higher on the week. The sideways movement has rendered the momentum indicators moot, and if one assumes the range remains intact until proven otherwise, the risk-reward and the rule of alternation would seem to discourage new longs.


A range of about 1.2-cents prevailed last week (~$1.0775-$1.0895), and the euro finished virtually unchanged. Demand around $1.08 seems to be gradually being absorbed. The euro traded below there five times in April and has matched that in the first half of May. A move and probably a close above $1.09 is needed to take pressure off the downside. Three-month implied volatility had its lowest weekly close (~6.7%) since the end of February. Volatility may increase as the EU and ECB move back into fore next month.

Japanese Yen

The range for the entire week was set on Monday (~JPY106.40-JPY107.75). The rest of the week was consolidation. The price action reinforces the month-old trading range of JPY106.00-JPY108.00. Three-month implied volatility is approaching the 200-day moving average near 7.10%. It peaked around 19% and was trading below 5% in mid-February.

British Pound

Sterling’s five-day slide shaved 2.3% of its value against the dollar and sent it to almost $1.21. It saw its lowest level since March 26 ahead of the weekend. The MACD is rolling over, but the Slow Stochastic is getting stretched. The convincing break of the late April low near $1.2240 and the (38.2%) retracement objective (~$1.2175) are bearish technical developments. Although initial support may be encountered in the $1.2000-$1.2030 area (psychological support and the 50% retracement objective), the risk extends to $1.1850-$1.1880 (61.8% retracement and the measuring objective of the double top at $1.2650, with a neckline at $1.2250). A move back above $1.2250-$1.2300 would help stabilize the tone.

Canadian Dollar

The US dollar rose four of last week’s five sessions. It gained about 1.2%, the largest weekly rise in six weeks. An outside up day on Monday set the stage. The greenback rose from CAD1.3900 to roughly CAD1.4140. Since the explosive moves in March, the exchange rate has found a base around CAD1.3850. On the topside, the greenback has been making lower highs. The downwardly sloping trendline is found near CAD1.4160 to start the new week. The Canadian dollar remains sensitive to the general risk appetite, more so than the Australian dollar (60-day correlation of the percent change of the S&P 500 and the exchange rate 0.51 vs. 0.47, respectively). More inclined to see an eventual upside break for the greenback.

Australian Dollar

We have been looking for the Australian dollar to top out. It tested the late April high near $-0.6560 and reversed to post an outside down day on Monday. It approached $0.6400 in the second of the week and settled on the week’s low. For the first time since April 3, it closed below its 20-day moving average (~$0.6435), and the five-day moving average can move below the 20-day in the coming days. The MACD is rolling over from over-extended territory while the Slow Stochastic is tuned down from a secondary bounce. The next support area is around $0.6370, and a break could confirm a top is in place and warn of losses toward $0.6170, a measuring objective of a double top, and the (38..2%) retracement of the big rally off the March spike low to almost $0.5500.

Mexican Peso

The dollar rose 1.6% against the peso last week to snap a two-week 5.4% slide. After peaking around MXN25.78 in early April, the greenback has been consolidating. It has held below MXN25.00 this month and found support in the MXN23.50-MXN23.75 band. Initial resistance is now seen in the MXN24.50 area, and a three-week downtrend line begins the new week just below there. The MACD continues to drift lower, while the Slow Stochastics are just turning higher. The peso initially strengthened after Banxico delivered the 50 bp rate cut that was widely expected (overnight target is now 5.5%), but the pullback in equities proved too much, allowing the dollar to finish the week above MXN24.00.

Chinese Yuan

The yuan fell by about 0.4% against the dollar last week. Only a handful of currencies rose against the greenback, and the JP Morgan Emerging Market Currency Index fell by nearly 0.7%. It is not so much the magnitude of the dollar-yuan exchange rate movement, but the level that is notable. The dollar traded at a six-week high (~CNY7.11) before the weekend. It is the second close this month above CNY7.10 after not doing it at all last month. Some may link the yuan’s weakness to the escalating US rhetoric. We suspect that ahead of the National People’s Congress, Chinese officials likely prefer a stable yuan.


A four-day rally lifted the yellow metal above $1750 ahead of the weekend, its best level since late 2012. The advance began with an outside up day on May 7 from a low near $1677, as gold fell by about 1% over the next two sessions. However, the recovery and push higher was steady, and closes were near session highs, but only marginal new highs were seen as stops were triggered above the mid-April high near $1747 and more at $1750. Both the MACD and Slow Stochastics are pointing higher. The next big target is $1800. Initial support is likely near $1720.


Light sweet crude oil for July delivery extended its rally for a third successive week. The 13% rally lifted it to almost $30 a barrel ahead of the weekend. A small increase in demand, coupled with cuts in output, has helped prices recover. The US recorded its first decline in oil inventories since January, and there is a push for OPEC+ not to boost output in the next phase of the agreement output restraint agreement. The key technical level is $35, roughly last month’s high and the (38.2%) retracement of this year’s decline. It is also a level that reportedly will bring back some production. The MACD and Slow Stochastic are stretched but have not begun rolling over. This would seem to be consistent with a push closer to $35, but profit-taking is likely ahead of it.

US Rates

After absorbing a record-sized refunding, US coupon yields were lower on the week. In fact, ahead of the weekend, the 10-year yield touched its lowest level here in May, just below 59 bp. The yield bounced back as investors seem comfortable with the 0.60%-0.70% range. The two-year yield, which fell to record lows the week prior to near 10 bp, stabilized and finished the week little changed.

While the Fed continues to taper its Treasury purchases, some of its other facilities are just becoming operational. Purchases of corporate bond ETFs, which may include some high-yielding bonds, are formally launched last week. The Fed’s balance sheet rose by about $213 bln (~3.2%) last week, the most in nearly a month. The March and April 2021 fed funds futures contracts hover around zero, but the May contract has not implied positive rates for seven sessions and counting.

Foreign central banks continue to replenish their Treasury custody account at the Fed that was drawn down in March and the first half of April. Official holdings rose by $21.2 bln in the fifth consecutive week of accumulation.

S&P 500

The 1.5% rally in the last two sessions was not sufficient to offset the earlier losses, and the S&P 500 fell by about 2.25% last week. It reversed higher from three-week lows recorded on May 14 (~2766.6) and saw follow-through gains ahead of the weekend, with a close above the May 14 high (~2852.8) and back above the 20-day moving average (~2856.3). The momentum indicators are mixed with the MACD continuing to flatline near the highs and the Slow Stochastic turning back lower from the middle of the range. Resistance seems clearer than support presently.

The double top from late April and early May is in the 2945-2955 area, and then there is the 200-day moving average and psychological resistance around 3000. A close below 2800, which has not occurred in three weeks, might signal a new phase. The April equity recovery, which lifted the NASDAQ into positive territory for the year, arguably, was fueled by the removal of the far left-hand tail risk by officials that moved to replace part of the income lost during the shutdown. Now, it seems as we anticipate the survey data to begin showing some improvement as economies start opening up, risk appetites may wane as focus shifts toward the long slough back to a new normalcy.

This article was written by Marc Chandler, MarctoMarket.

Euro Area’s Fiscal Plans Face Financing Challenges Following Covid-19

Understanding gross financing needs (GFNs) is essential to assessing the sustainability of sovereign borrowing by providing an aggregate figure of the maturing debt volume, primary fiscal deficits and interest payments in a fiscal or calendar year.

In 2020, Scope Ratings expects euro area gross financing needs of around 18% of it’s GDP, assuming an aggregate primary deficit of 6% of the GDP and interest payments of 1.8%. By comparison, in 2019, GFNs amounted to 12% of GDP.

“We expect for 2020 a similar overall size for euro area gross financing needs compared with that in 2009, at the peak of the Global Financial Crisis, but this time the focus around the composition will be different,” says Giulia Branz, an analyst at Scope and co-author of the Euro Area Gross Financing Needs in 2020:
rise mitigated by favourable composition . “Hefty fiscal stimulus is the main driver of the rise in GFNs in 2020 while interest payments and the amount of maturing debt remain lower than in 2009,” she says. “Governments are issuing debt to counter-cyclically address the crisis, rather than to service past borrowing. This may support faster economic recovery and thus strengthen debt sustainability over the medium term.”

The euro area’s total GFNs this year might remain comparable to those during the Global Financial Crisis in 2009 if the economic contraction from the Covid-19 remains close to Scope’s baseline estimate of around 6.5% of the GDP. At the same time, euro area governments have varying degrees of fiscal space, with projected GFNs in 2020 ranging from 8% in the case of Estonia to over 30% of GDP in Italy’s case.

The Italian exception

“Italy is among the few countries facing very similar amounts of amortisations and interest expenditures this year compared to 2009, despite recurrent primary surpluses in the aftermath of the financial crisis and the extraordinary interventions of the ECB,” says Branz.

Italy’s gross financing needs in 2020 nonetheless remain far below those projected for other reserve currency sovereigns such as the United States (38.5% of GDP) or Japan (45.6% of GDP). In addition, the European Central Bank’s enhanced role as a lender of last resort and will support fiscal sustainability despite the one-time surge in fiscal deficits. ECB support is expected to keep interest costs low to mitigate spreads in risk premia across countries and absorb part of the additional gross financing needs resulting from higher primary deficits.

An elevated 2020 euro area deficit but a more homogenous fiscal response

“In absolute terms, we currently estimate the euro area’s fiscal deficit for 2020 at around EUR 890bn. This compares with the ECB’s additional purchase programmes totalling around EUR 1trn, of which we can assume around 70% relate to euro area government securities purchases.”

Scope’s forecast of an aggregate euro area fiscal deficit of around 8% of GDP can be broken down into the pre-shock primary balance, shock-related discretionary spending, the cyclical component including higher unemployment benefits and lower tax revenues, in addition to interest payments. While the projection for the cyclical component deterioration is comparable to that seen in 2009, interest payments are significantly lower this time – thus creating the space for greater stimulus.

“We see greater use of fiscal spending in 2020 and more homogeneous fiscal responses across euro area countries, as the discrepancies in their fiscal balances, are set to be much lower than in 2009,” says Branz. Counter-cyclical and coordinated fiscal policy are what countries have to do to mitigate the impact of the economic shock. Still, this will inevitably translate into an increase in the stock of public debt.

A rise in regional debt, but via growth-enhancing spending rather than higher interest cost

“We project the euro area’s debt-to-GDP ratio will increase to a record high of around 98% in 2020, up from 84% in 2019. However, thanks to prudent fiscal policies over the past ten years, much of the increase in public debt results from higher primary spending rather than from higher interest payments.”

Euro-area governments have several ways to offset the impact of higher GFNs on future economic performance, including:

  1. Lengthening debt maturities to lower annual refinancing needs.
  2. Improving the euro area’s long-term fiscal capacity (such as creating a recovery fund, new forms of emergency lending, region-wide unemployment insurance).
  3. Monetary policy support during times of market volatility.
  4. Common endeavours to raise the euro area’s growth potential.

Download Scope’s full report

Giulia Branz is an Associate Analyst in Public Finance at Scope Ratings GmbH.

Risk Appetites Wane

Europe’s Dow Jones Stoxx 600 is off a little more to double this week’s decline and leaves it in a position to be the biggest drop since panicked days in mid-March. US shares are narrowly mixed, but coming into today, the S&P 500 is off 3.7% for the week, which, if sustained, would also be the largest decline in nearly two months.

Bond markets are better bid, and the US 10-year benchmark is off four basis points to 61 bp, the lowest in three and half weeks, despite the deluge of supply. European yields are off 1-3 bp. The dollar is firm against nearly all the world’s currencies. The yen, among the majors, and the Turkish lira and Russian rouble in the emerging market space, are the notable exceptions. Oil and gold are near five-day highs (~$1720 and $27 basis July WTI)

Asia Pacific

Australia reported a massive 594k job loss in April. While it was slightly more than most economists expected, given the magnitude, the median forecast of the Bloomberg survey for a loss of 575k proved fairly accurate. About 220k were full-time positions.

The unemployment rate rose from 5.2% to 6.2%. Economists had projected a jump to 8.2%. Australia’s 10-year yield is dipping below 90 bp for the first time this week. Wednesday saw record demand at the 10-year sale while the central bank has stepped back from its purchase program.

The Bank of Japan has also reduced its buying of equity ETFs and REITs. Its JGB buying had been tapered under its yield curve control initiative. Back in the particularly dark days in March, the BOJ bought a little more than JPY200 bln of the ETFs on four different occasions.

In the first five sessions of May, it purchased a total of JPY126.5 bln. Separately, a BOJ lending initiative in April that pays banks 10 bp on reserves associated with lending under the program is off to a successful start, and BOJ Kuroda hinted at an emergency meeting before the next formal meeting (June 16) to unveil a new facility to lend to small businesses.

Following the Reserve Bank of New Zealand’s move to put negative rates on the table, the government approved an NZD$50 bln (~$30 bln) stimulus package. It projects that the country’s debt will rise over 53% of GDP from less than 20% last year.

The 10-year benchmark bond rose six basis points today from the record low hit yesterday below 60 bp. Year-to-date, the Kiwi is the second worse performing major currency, off a little more than 11% (behind the Norwegian krone that has depreciated by nearly 13.7%).

The dollar rallied from JPY106.40 to almost JPY107.80 on Monday, and that has marked the range, for now, the third session. Narrower still, the greenback is within yesterday’s range (~JPY106.75-JPY107.30). There are two sets of expiring options to note today. There is about $1 bln at JPY106.75-JPY106.82 and another $1.1 bln in options struck at JPY107.00-JPY107.05 This is the fourth consecutive session that the Australian dollar is falling.

It is the longest streak since late March and early April. Watch the 20-day moving average. It is found near $0.6430 today, and although it has been flirted with on an intraday basis, it has not closed below it since April 3. A break of the $0.6375 area may be needed to confirm the top we have been anticipating. The dollar is little changed against the Chinese yuan and is hovering around the CNY7.09-CNY7.10 area, the upper end of its recent trading range.


Bank of England Governor Bailey hinted that the GBP200 bln bond purchase program will likely be extended as early as next month (next MPC meeting is June 18). Recall that at last month’s meeting, the majority wanted to wait while two members dissented in favor of an immediate increase of GBP100 bln in Gilt purchases.

While much attention has been focused on the fact that some derivatives in the US imply negative rates, the UK 2-year Gilt has a negative for the third consecutive session (about minus 3 bp). Since our experience with negative rates is so limited, we relied on induction to derive a hypothesis that countries with negative rates had central banks that led the move and have current account surpluses. That hypothesis is being tested. We suspect that the currency would have to bear more of the burden if this turns out to be the case.

The euro reached a seven-day high yesterday and approached $1.09 before reversing lower and recording new session lows late in the session near $1.0810. It is in about a 15-tick range on either side of that level, with little enthusiasm in either direction. There is a 1.2 bln euro option at $1.08 that expires today. Below there is an option for 1.8 bln euros at $1.0750.

The euro settled last week near $1.0840. Sterling fell to $1.2180 today, its lowest level since April 7, when it recorded the month’s low near $1.2165. It is lower for the fourth consecutive session, which is also its longest losing streak since March. Initial resistance is now seen near previous support in the $1.2250 area.


Powell had no more luck than his colleagues in removing the risk that the Federal Reserve will adopt a negative interest rate target. The implied yield of April 2021 through March 2022 fed funds futures contracts remains negative. The OIS forward curve is slightly negative two and three-years out. The impact on the dollar seems minimal at best.

It is higher against all the major currencies this month, but the Norwegian krone (~0.60%) and yen (~0.30%). Overall, Powell’s economic assessment was very somber. He indicated that a report out today will show that 40% of the households under $40k a year income, who had a job in February, lost it. Powell advised not placing much stock in estimates of full employment. The Chair tends not to put weight on economist’s intangible concepts like r-star (natural interest rate) or full-employment.

Powell called for more fiscal support, a day after the House of Representatives prepared an additional $3 trillion spending bill. When coupled with Dr. Fauci’s comments the previous day, calling for more testing and tracking, and slowing the re-opening process, the message appears squeezed risk appetites.

There are two highlights of the North American session today. First is the release of the US weekly initial jobless claims. Economists expected a decline to 2.5 mln, which is still around ten-times larger than what was prevailing before the crisis. It has been gradually declining since reaching above 6.8 mln in late March. Separately, the continuing claims are likely to push above 25 mln.

Note that the survey for the next monthly jobs report is being conducted this week. Second, the central bank of Mexico meets today, and the consensus forecast is for a 50 bp cut to 5.50%. A week ago, Mexico reported that April CPI fell to 2.15%. Given this and the broad stability of the peso, we suspect that if Banxico is to surprise, it is more likely to deliver a larger rather than a smaller cut.

For the fourth consecutive session, the US dollar has edged above the previous session’s high against the Canadian dollar. However, it is better offered in the European morning. The CAD1.4040-CAD1.4060 may provide support today, but it seems particularly sensitive to the broader risk appetites.

Tuesday’s range in the greenback against the Mexican peso is to be watched (~MXN23.75-MXN24.40). After rallying strongly in March and into early April, the US dollar has been consolidating for over a month and has largely been confined to a MXN23-MXN25 range. Lastly, note the EIA reported the first decline in US oil inventories (-745k barrels) since the middle of January.

Holdings in Cushing fell by 3 mln barrels. This, coupled with the IEA assessment of a marginal improvement in supply (reined in) and demand (a little stronger) dynamics, are helping to underpin prices today.

This article was written by Marc Chandler, Marcto Market.

Will Powell have any more Luck Pushing against Negative Rate Expectations in the US?

India led the way (~2%) after a fiscal stimulus program was announced. European shares, though, are heavier, led by consumer discretionary and financial sectors. US shares are steady to firmer. After a slow start, European bonds have rallied and yields are 2-3 bp lower, with Italy’s benchmark off about 6 bp to 1.82%.

Bond markets are mostly quiet, but the Reserve Bank of New Zealand’s increase in bond purchases and indication that negative rates are possible saw the benchmark yield fall around 12 bp and took the currency about 1% lower. The 10-year US Treasury is a little softer at 66 bp.

Outside of the Kiwi, most of the major currencies are mostly firmer, led by the Norwegian krone and Canadian dollar. Emerging market currencies are mixed, with eastern and central European currencies a little heavier. Gold continues to hover are $1700 and July crude continues its broadly sideways drift.

Asia Pacific

India announced a package of INR20 trillion or 10% of GDP. The details are not yet clear, but it does appear that officials have combined several previous commitments and central bank measures. The fresh initiatives, though, still appear substantial and are estimated around INR8-INR12 trillion (~4%-6% of GDP).

The Reserve Bank of New Zealand doubled its bond-buying efforts to NZD60 bln. It left its cash rate target at 25 bp but suggested that negative rates are possible. Thus far, no country with a current account deficit has adopted negative interest rates. New Zealand’s current account deficit was about 3.3% of GDP in 2019.

The US dollar jumped to a little more than JPY107.75 to start the week after testing the JPY106 area while Japanese markets were closed in the first half of last week for the Golden Week holidays. Yesterday and today, the dollar has pared Monday’s gains and now is testing JPY107.00 where a nearly $900 mln option is set to expire.

The dollar is third of a yen range today, and the upside looks to be blocked with the help of a $1.1 bln expiring option at JPY107.40. The Australian dollar fell nearly 1% over the past two sessions, but it found support near the 20-day moving average (~$0.6425), which it has not closed below in over a month. There is an option for A$1 bln at $0.6500 that expires today. The greenback is firm against the Chinese yuan as it holds in the upper end of the CNY7.05-CNY7.10 range that has largely contained it in recent weeks.


The two main economic reports from Europe were not as dismal as expected. The eurozone reported industrial output in March fell 11.3%. The median forecast in the Bloomberg survey was more than a 12% slump. The UK economy contracted 2% in Q1 with the median estimates looking for a 2.6% decline in output. The monthly GDP estimate showed a 5.8% decline in March alone.

The Bank of England is expected to increase its bond purchases as early as next month. The ECB is also likely to increase is Pandemic Emergency Purchase Program (PEPP) as well, but the timing is less clear.

On the fiscal front, the UK has extended its furlough program until the end of October and will not taper it until at least July. Italy’s cabinet approved the 55 bln euro stimulus package. Nearly 30% is for its employee furlough program. More than 10% is earmarked for what appears to be grants to small businesses. And nearly another 10% is for self-employed and seasonal workers.

The euro traded in a cent-range yesterday (~$1.0785-$1.0885) and today is in a little more than a quarter-cent range above $1.0830. The consolidation looks set to continue. Sterling fell to around $1.2255 yesterday, its lowest level in over a month. A marginal new low was made in Asia, before sterling was bid in Europe to toy with the $1.2300 area. There is potential toward back toward $$1.2340-$1.2350.


There are three events in the US today to note. First, the US reports April producer prices. The deflationary shock is well recognized, and the collapse of oil price will send the headline PPI into negative territory. However, the core rate, which excludes food and energy, is likely to fare considerable better. The median forecast in the Bloomberg survey is for a 0.1% decline on the month for a 0.8% year-over-year gain.

In yesterday’s April CPI, gasoline prices fell by over 20% while food prices rose 1.5%. Second, the EIA will make its weekly energy inventory report. API estimated that oil stocks increased by about 7.6 mln barrels, but at Cushing, they might have fallen by more than two million barrels. This would be the first decline in 10 weeks.

Third, Federal Reserve Chairman Powell speaks at the Peterson Institute (9:00 am ET). He is expected to push back against ideas a negative funds rate. Despite the efforts of several regional presidents to play down this scenario, the fed funds futures strip starting next March imply slightly negative rates. Another common theme of Fed speakers have been that more support may be needed for the economy. This is seen as a balance sheet issue and fiscal policy.

After raising $100 bln in cash management bill sales, the Treasury sold $32 bln 10-year notes at a lower yield than the previous auction (70 bp vs 78 bp), with a higher bid-to-cover (2.69 vs 2.63), and more taken up by indirect bidders that include asset managers, hedge funds, and foreign central banks (66.1% vs 59.2%). More is coming. It is not just today’s $20 bln 30-year bond sale to round out the quarterly refunding and another $75 bln of cash management bills, but another large spending bill has begun its circuitous route to become law.

The initial estimate of the House bill is about $3 trillion and that is on the day that the US reported a record $737.9 bln deficit for the month of April. Around a third of the bill is for states and local governments. There are also funds for another $1200 payment adults, which is means-tested, and money for elections and the postal service.

The deduction for state and local taxes is also brought back. Of course, as the Senate Majority Leader noted it is aspirational. It must be negotiated with the Senate, and especially Trump Administration. However, the House took first-mover advantage and forces the GOP to be less “Rooseveltian” with the election now less than six months away.

The US dollar settled last week near CAD1.3925. It recovered 0.5% on Monday and again on Tuesday but has run out of steam near CAD1.4085. Support is seen in the CAD1.3980-CAD1.4000 area today. Similarly, the greenback finished last week around MXN23.65 and gained 1% on Monday and 2% yesterday to reach MXN24.40.

It is trading softer now around MXN24.10. Dollar losses may be limited in North America today ahead of the Banxico rate decision tomorrow. Although a 50 bp cut is widely expected, there is scope for 75 bp move. More political problems for Brazil’s President Bolsonaro weigh on the real, which fell to new record lows yesterday (the US dollar rose above BRL5.89). Today, Brazil reports March retail sales and its economic activity index. The only question is how fast of a contraction is being experienced.

This article was written by Marc Chandler, MarctoMarket.

US Budget Outlays at Record High, but the Fed Says More is Needed

The President of the Reserve Bank of Dallas, Richard Kaplan’s words were one of the reasons for increased pressure in the markets the day before. Now markets await Powell’s testimony later today with double concerns.

Kaplan, who spoke on Tuesday, said he expects unemployment to peak at 20% with a decline to 8-10% by the end of the year. This high was last seen at the lowest point for the economy after the Global Financial Crisis in 2008.

Investor caution is easy to understand. Fresh data on the US fiscal balance sheet showed a record monthly deficit of $738 billion in April at the expense of $980 billion in expenditures in one month alone. The accumulated budget deficit since the beginning of the fiscal year has already reached a record high of $1.5 trillion, although only seven months have passed.

And this is not the end. Many federal business assistance programs will only start paying money to companies in May, promising to more than double the state budget deficit.

The US president and the secretary of the Treasury said it’s necessary to wait for some time to consider new stimulus. At the same time, they note that the next packages of measures will be tax breaks, not new money. The democrats, on the contrary, have already submitted a further $3 trillion support package for consideration.

The United States can attract huge funds from the markets and not suffer from a drop in government bonds prices (increase in their yield). But any loan has a limit. The US has not yet reached this ceiling. However, senior government officials are afraid that it is somewhere nearby, which makes them increasingly wary.

Potentially, the Fed could switch from inflation targeting to targeting the yield curve of government bonds, up to yield levels of 10-30-year bonds, as it did between 1940 and 1950.

This policy allows keeping the financial situation under control during a difficult period when almost limitless funding options are needed. But as a result, there is distortion in financial markets in favour of short-term government bonds. This does not create the right stimulus on corporate bond markets, as there is a threat of negative real income on a longer horizon.

by Alex Kuptsikevich, the FxPro senior market analyst

Negative Interest Rates – LIsten to the Markets

This doesn’t just concern rates or fixed income traders, but the flow-on effects are being felt in FX and equity markets too. The interesting aspect here is that this is not just the US, but the markets are close to pricing a negative interest rates policy (NIRP) from the BoE, while the RBNZ has also said they are talking to their banks about NIRP.

The two main considerations

There are two ways to look at this argument – the first being whether the market sees negative rates as a positive or a negative for risk assets. The second is the prospect of it happening, just how dark the world would have to be, and importantly, what role could the financial markets play in getting us to the point of negative rates.

In terms of the second consideration, other than Fed chair Powell, and perhaps Richard Clarida and Lael Brainard, I will take my cues on NIRP solely from the market on this matter. When the market has a vision they can influence whether NIRP materialises – just as we saw in late 2018 (Fed balance sheet taper) and in the leadup to the global COVID-19 crisis (rate cuts) – when the markets go after an idea and want change in monetary policy the moves in markets can be prolific.

Negative rates pricing came from nowhere

It is a little strange how the conversation of negative rates suddenly sprang into life, as there was no one smoking gun. Granted, noted economist Kenneth Rogoff’ well-known views on negative rates have been regurgitated, and we saw ex-Minneapolis Fed president, Narayana Kocherlakota, putting out an opinion piece on the subject. But, for this to become a central theme in markets and attract the attention of multiple Fed speakers, not to mention capture a decent chunk of Stanley Druckenmiller’s overnight speech at the NY Economic Club, is bizarre.

At the risk of being a conspiracy theorist, it’s almost like an entity has put out a trial balloon for the market to debate and ultimately remove any taboo. Most Fed members are openly opposed to negative rates, but by openly discussing this it removes much of the shock factor well in advanced.

The fact is NIRP is a monetary policy tool they have in their arsenal. Perhaps it’s one that will be deployed behind yield curve control, increased QE, forward guidance or even equity purchases, but it is one they can use, and the market has it on their radar.

As Cleveland Fed President Loretta Mester made clear (in her speech overnight) – “we don’t view negative rates as a go-to tool for the Fed”. Fair, but its one they acknowledge and fits in well with a 2019 paper authored by Eric R.Sims and Jing Wu titled ‘Evaluating central banks’ tool kit: Past, present and future’, in which they lay out the policies available and the probable and preferred order should each be rolled out – I suspect this has been adopted through the Fed collective, and negative rates are the last one off the run sheet.

Markets pricing negative rates

The swaps and fed funds futures curve started to price in negative rates last Thursday, where we saw the June fed funds futures trade to -5bp. Options on Eurodollar futures were pricing in a 20% chance of a cut, and if we look at the swaps market now and 1Y1Y OIS, we can see this now at -3bp – while in the UK, swaps pricing (top pane – white) on 1Y1Y OIS is about to turn negative. Rates traders have been quick to point out that this element of negative pricing is more technical in nature, with funds hedging tail risk rather than it being a genuine play on a change in policy.

Source: Bloomberg

Rates pricing aside, the US 2-yr Treasury gets the close focus on the bond curve. At 16bp we are at or getting into the zero lower bounds (ZLB), but a move through 10bp would be the trigger to show the bond market is preparing for the Fed to move. That won’t come anytime soon, and is incredibly unlikely in 2020, but if equities do turn lower and vols pick up markedly then the market will go after the Fed and explore what they have in their toolbox.

Are negative rates positive or negative for risk?

At this juncture the market likes the idea of negative rates – I guess the notion that investors are pushed further out the risk curve is seen as good for risk assets. One can argue that by lowering the discount rate, the net present value (NPV) for high cash flow business increases, which is why we have seen US tech working so well. The same is not true for banks, and as we can see with JPM – one of the world’s premier financial institutions – is holding a strong relationship with the 2-yr UST.

The fact the S&P500 and NASDAQ 100 has rallied whenever there has been talk of negative rates being adopted is likely because of concentration risk, where a handful of mega-cap stocks command a sizeable weighting on both indices. If the financial sector commanded a 30% weight on the S&P500, for example, we’d likely see the index fall when talk of NIRP kicked up – so index composition is key.

A close up of a computer Description automatically generated

I also expect the USD to become far more sensitive to moves in US2yr, and as we can see, the 20-day rolling correlation between the DXY and UST 2s sits at 38%. Looking at the distributions over the past five years, we have typically seen this correlation closer to 55%, so I expect this relationship to grow, where higher bond yields result in USD strength and vice versa. I would expect USDJPY to be especially correlated, with the 20-day correlation moving above 80%.

Gold, Bitcoin and EM FX would also be a beneficiary of negative rates.

(20-day rolling correlation between the DXY and US2yr)

A very high barrier to entry

There is no doubt that most economists and market participants see negative rates as unlikely, but also incredibly undesirable and counterproductive. Why wouldn’t they? It has smashed banks profitability in Europe and Japan and the various case studies we have hardly make the policy seem compelling.

US banks will mount a serious PR and legal challenge here, as it would represent a tax to them. Let’s not forget they have strong ties to the Fed, who would need to alter the Fed Act to allow the fed funds effective rate to move below zero. We also need to remember the US banks have just made massive provisions against future bad loans. As we can see from the chart, bankruptcies tend to follow the unemployment rate (blue), although we’re told that many of these jobs are to return once the economies re-open.

So, penalizing the banks at this vulnerable time could see interbank lending rates (think Ted Spread) rise.

A screenshot of a computer Description automatically generated

Listen to the market

The thing is it does not really matter what economists or Twitter influencers think of negative rates. It only matters that the Fed is open to the idea of negative rates and that NIRP is in the toolbox as an option – but that is it. What matters is what the market thinks, how the collective flow of capital moves in anticipation of the negative rates, and from what we have seen of late is that negative rates are positive for risk.

Negatives aside, consider the other side of the argument:

  • The likely $4t deficit needs funding. Adopting negative rates would help keep the associated costs down. With yield curve control presumably in place, bond investors will demand greater compensation for having to fund the US Treasury, but yields would be capped, and bond investors have a pre-defined risk.
  • It will be another blow to savers, but they have had a negative real return for some time, and this could force investors into the corporate bond space, which is now backed by the Fed. There is plenty of real returns in this asset class, with the Fed having reduced the risk.
  • By adopting negative rates, the Fed could weaken the USD, which may, in turn, boosting the EM trade.
  • Negative rates would bring down lending rates. Of course, you need demand from borrowers, but if you’re in the market to buy a house then it will be cheap.

Personally, I see pro’s and many cons but when the market puts NIRP in their collective sights, it will presumably mean the world is a dark and gloomy place and of the many other policies the Fed throw at supporting the economy are failing. I think that makes the potential effectiveness of NIRP incredibly hard to model and it could be a case of being careful or what you wish for.

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Chris Weston, Head of Global Research at Pepperstone.

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The Phantom Threat of Inflation and Fears of Covid-19’s Second Wave

This is associated with the emergence of a new sickness case in Wuhan, which brings back fears of a second wave of spread after the restrictions were lifted.

At the same time, the global picture clearly shows a decrease in the number of new infections and deaths in the past 24 hours. In our opinion, we should look for other reasons behind the difficulties of market growth. The US Treasury is draining market liquidity by placing unprecedented amounts of government bonds to finance support packages.

While the US Treasury is “vacuuming” the market, the demand for dollars remains high. Besides, the Fed has sharply reduced the scope of asset purchases on its balance sheet, which has lessened support for markets.

At the same time, investors take profit in those securities, which offset the decline of February-March. Sales on growth seem to be the prevailing strategy in recent days. The focus is on those shares that can benefit from the global economic slowdown.

First of all, these are producers of essential goods and grocery store chains. At the same time, there is a rupture in the supply chains of products, which makes us think about the risks of food inflation in the coming months.

Food does not play a significant role in today’s spending structure, with just 14% of expenditures. So, we are likely to see food prices increase along with a decline in the overall volume in the food industry in the coming months.

The inflation data published in China this morning showed a slowdown in consumer price growth in April to 3.3% YoY from 5.4% in January. The decline in producer prices accelerated to 3.1%, indicating a deflationary trend for almost a year.

Later this afternoon, the US data will be published, which is expected to show a slow down of CPI to 0.4% YoY, the lowest level in almost five years. Excluding energy and food prices, it is expected to slow to 1.7% YoY from 2.4% at the peak in February. Surprisingly, this indicator risks coming under pressure in the nearest months, justifying a softening of monetary policy.

But if we look further, the impending reboot of the logistics chain risks is becoming a severe factor in favour of rising inflation. Globalization was previously a crucial deflationary factor. Deglobalization promises to drive prices up, which is bad for the poorest countries as well as the rich.

By Alex Kuptsikevich, the FxPro senior market analyst. 

Italy: Debt Sustainability Supported by ECB as Covid-19 Crisis Brings Rise in Debt and Funding Needs

In a new report, Scope Ratings outlines a severe decline in nominal GDP in Italy (rated BBB+/Stable) this year from the Covid-19 crisis, with real economic output set to contract by 7.5% – and downside risk to this estimate. Italy’s budget deficit could widen to more than 10% of GDP while public debt is expected to rise above 155% of GDP from 135% at end-2019.

The ECB’s bond-buying programmes are crucial in ensuring Italy benefits from low interest rates, so a future move to wind down net purchases could increase longer-term financing risks given structurally higher yearly funding demands.

“We expect public debt to rise above a 155% of GDP level in 2020 with this debt ratio maintaining an upward trajectory longer term – remaining relatively unchanged in years of positive growth but adjusting significantly upwards in years of recession,” says Dennis Shen, lead analyst on Italy’s sovereign rating at Scope and co-author of the report. “This unfavourable long-term trajectory reflects in significant part weak nominal growth dynamics.”

Short- and longer-term debt sustainability risk

“In addition, with concern to short-term debt sustainability, we expect 2020 gross financing needs for Italy to rise above 30% of GDP under a baseline and then to fall somewhat, as fiscal deficits are trimmed after the crisis, but remain above 25% of GDP a year through 2024,” says Shen. “As such, financing needs are significantly above an IMF gross financing needs threshold of 20% of GDP, above which an advanced economy is categorised as under ‘high scrutiny’.”

In addition to its baseline debt projection, Scope sets out in the report a stressed scenario in which public debt levels rise more significantly.

Although government debt is increasing, budget stimulus of 4.5% of GDP in 2020 alongside 40% of GDP in public guarantees on bank loans are key components of the government’s counter-cyclical fiscal response, similar to that announced by countries like France and Germany.

ECB actions mitigate immediate liquidity risks

For now, the ECB’s forceful actions have helped to avoid a liquidity crisis in the euro area and eased concern to an extent about Italy’s medium- to long-run debt sustainability.

Yields on 10-year Italian government bonds are below 2%, comparatively low when viewed against the above 7% reached during euro area sovereign crisis peaks of 2011-2012.

ECB intervention remains vital for the preservation of Italy’s market access and facilitating sustainable funding rates for the government to cover elevated financing needs.

We estimate the ECB could indirectly cover additional gross funding needs Italy has during this 2020 crisis beyond pre-crisis financing requirements of 2019 in full.”

This acknowledges the flexibility the ECB has – specifically with concern to the Pandemic Emergency Purchase Programme – to deviate from capital key purchase targets for a period of time and acquire more or less of a specific country’s bonds if it chooses. “This includes higher purchases for a while for those governments most exposed to the crisis, including Italy.”

Any winding down of ECB interventions presents challenges

“Nevertheless, our new analysis shows that Italy is likely to experience structurally higher debt post-crisis, alongside structurally higher annual funding needs, raising longer term questions over the sustainability of Italian debt especially under any scenario of greater reduction in intervention post-crisis from the ECB,” Shen says.

Future winding down in ECB crisis-era net purchases and any movement, in the long run, towards reducing the size of the ECB balance sheet – including, for example, any non-re-investment of maturing Italian government bonds – could present significant challenges for Italy and result in the more likely materialisation of debt sustainability concerns.

“Significant market assistance from Italian banks and Italian savers through so-called home bias – with 65% of Italian government debt held by domestic investors ensuring a stable local buyer base in moments of crisis – would only partially compensate in this scenario,” Shen concludes.

Download Scope’s full report

Dennis Shen is a Director in Public Finance at Scope Ratings GmbH.

Worst Jobs Report In History – And The Market Continues To Rally

Unemployment Grows

As the unemployment numbers get worse and worse, the market continues to rally higher and higher. In fact, the futures rallied 70 points off the overnight low struck on Wednesday night even after the negative employment data was announced Thursday morning, and then rallied another 60 points off the overnight low struck on Thursday night despite the worst employment report in history being presented on Friday morning.

I see more and more articles being published that tell everyone exactly what they already “know” as a certainty: We are setting up for a major crash in the market as we usher in the next Great Depression.

Yet, has the market not taught you that it is not driven based upon this type of reasoning? Trying to reason with the market (which is emotionally driven) is like trying to reason with your spouse when they are being emotional. How well does that work for you?

But, think about it, folks. Does the market ever do what the great majority expect it to do at major inflection points when people get the most emotional? Yet, everyone is so certain that the market is going to crash. And, this is even after a 35% crash has already occurred. I think they call that “recency bias,” which has now been layered on top of the confirmation bias many readers seem to be coming to FX Empire for at this point in time. Well, they do say that bearishness sells.

When to Start Buying?

This same emotional phenomena is why it is so hard to buy the lows when they do hit. In fact, I have a confession to make. As the market was bottoming out towards the end of March in the 2200 region, I was presenting to my 6000+ subscribers my expectation for the market to bottom and begin a rally back up to the 2600-2725SPX region. At the time, I posted my own investing/trading plan and how I was staggering my additions to my market holdings.

Yet, when I went to hit the buy button, I have to be honest in saying that this was the most difficult buying I ever encountered. The fear was palpable on March 23rd as we were striking the bottom of the support target on my SPX chart. In fact, as I was noting to my members that I was buying long positions, quite a number of them (mostly the new ones) were telling me I was crazy because it was “so clear we have lower to go” because of the virus issues.

Well, I have to also admit that this was not the first time I have been called crazy, and I doubt it will be the last time.

Back in 2011, when gold was in the midst of a parabolic rally wherein it saw days of $50+ price rallies, I posted public analysis that said you should sell at $1,915. And, boy was I called crazy then – even though gold topped within $6 of my target.

I was again called crazy for going long gold in the December of 2015 the night we hit the bottom. In fact, our ability to be able to buy the lows in metals has been noticed by Doug Eberhardt – the owner of – when he said this to me in our trading room at

“I can attest to your accuracy on actually buying both gold and silver from us as close to the bottom as one could. With gold you called it to the letter and your limit order which was placed well in advance executed perfectly . . . Your timing on buying the dips is uncanny Avi! People should be aware of this.”

And, then when we bought silver in March when it spiked below 12, he said this to our members:

“Avi has the magic touch. Listen to him . . . I want to explain to you all what Avi did for you. He got most of you to buy the metals before the premiums shot up and before everyone ran out of product. This is the 2nd time he has done this and kudos to him for doing that for you.”

Again, I was viewed as crazy at the end of 2015 when I called for a correction in the market from the 2100 region back towards the 1700-1800 region, which would then set up a “global melt-up” in 2016.

I was also called crazy when I told my members that I was going long bonds in November of 2018, and even wrote about it publicly. Everyone thought I was nuts because the Fed was still raising rates. Yet, we caught the exact lows that month.

This has happened many, many more times than I am even citing in this article. So, I am quite used to be called crazy at this point, and I now wear it as a badge of honor, since it often means that it will likely be the right move.

Now, admittedly, as I outlined to our members at the time, I was uncertain as to whether the bottom we were striking in March was going to be THE low, or if we would have one more marginally lower low yet to be seen. This is why I also outlined my own buying plan which takes into account both those possibilities through a layered buying approach which is based upon my Fibonacci Pinball method of Elliott Wave analysis.

As it stands right now, the market is sending us more messages that a bottom has indeed been struck relative to the evidence that it can potentially see a lower low still. Ultimately, the market is going to have to complete a 5-wave rally structure back up tows the 3200SPX region in the coming months to convince me a long term bottom has indeed been struck, which will then begin a larger degree pullback likely taking us into late summer, or even the fall, which should likely be aggressively bought. You see, if the market completes 5-waves up off the March low, then it would confirm my expectation that we are going to rally to 4000+ in the coming years, with strong potential for a blow-off top to be seen as high as the 6000 region.

In the coming week, much will depend upon how the market reacts early in the week. If we see the futures sustain a break out over 2942ES, then we are likely heading up to the 3000-3060 region over the coming week or two. However, if the market is unable to break out over that level, and turns down impulsively below 2870ES, then it opens the door to re-test the 2700-2750SPX region.

Now, for those that may be confused by my analysis, please understand that the stock market is not an environment in which we can expect certainty. Rather, it is a non-linear environment. Therefore, one must approach the market from a non-linear perspective. To this end, we have a primary perspective within our analysis. Yet, if the market deviates from the structure we would expect within the primary analysis, we immediately move to our alternative perspective in order to adjust our positioning to minimize losses and re-align with the market price structure.

Lastly, I want to remind those that read my analysis that it is based upon probabilities, as there is no such thing as certainty within non-linear environments such as the financial markets. The majority of the time, the market provides us with a relatively clear path and provides us strong goal posts as it moves through its structures. But, none of my analysis is meant to be seen as a certainty. And those that have followed me for many years know how well we have done in the markets we track, and being flexible and listening to the market has certainly kept us out of trouble and kept us profitable.

By Avi Gilburt,

Avi Gilburt is a widely followed Elliott Wave analyst and founder of, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.

Quiet Start to a New Week

Benchmarks off all three regions rallied by 3.4%-3.5% over the past two weeks. Bond markets are also little changed, with the US 10-year benchmark just below 70 bp ahead of this week’s record refunding. Core European yields are slightly higher, while the peripheral premiums have edged in. The dollar begins the new week firmer across the board, with the New Zealand dollar and Japanese yen the weakest, off around 0.5%.

Except for a handful of mostly currencies from smaller Asian countries, most emerging market currencies are also beginning the week with a heavier tone. Gold is a little lower as it tests $1700, and July WTI is heavy near $25.50 after stalling near $28 last week.

Asia Pacific

China’s aggregate financing rose by nearly CNY3.1 trillion last month, a little stronger than most economists expected after a CNY5.1 trillion increase in March. The annual growth rate accelerated to 12% from 11.5% and is the highest in two years.

The main catalyst was bonds issued by and lending to local governments, which is the vehicle of China’s stimulus, not the central government. Separately, the PBOC’s quarterly monetary policy statement promised more powerful policies to promote growth and job.

What it did not say was also important: it did not repeat pledges about avoiding excess liquidity. Many expect new initiatives after the National People’s Congress in about ten days.

South Korea’s reported exports in the first ten days of May slumped 46.3% from a year ago. That followed a 24.3% decline last month. Average daily exports fell by a little more than 30%. Exports to the US were off almost 55%, while shipments to the EU were off 50.6%. Exports to China fell by 29.4%.

In terms of products, the exports of semiconductor chips and wireless devices fell by 17.8% and 35.9%, respectively. Imports were off 37.2%, but the imports of chip fabrication equipment rose by almost 70%.

Since Japanese markets re-opened from the Golden Week holiday on May 7, the dollar has risen in all three sessions. The greenback bottomed last week just below JPY106.00. It climbed steadily in Asia and reached almost JPY107.30 in the European morning, its highest level since May 1.

Initial resistance is seen near JPY107.50 then JPY108.00. Intraday technicals are stretched. A close below JPY107 would be disappointing. The Australian dollar’s gains were extended to $0.6560, just shy of the rebound high (~$0.6570 on April 30) but have reversed lower to test the $0.6500 area in Europe.

A break, and ideally a close below, the pre-weekend low of about $0.6490, would be another opportunity to try picking a top. At the least, it may signal a test of $0.6400. The dollar rose by about 0.2% against the Chinese yuan to about CNY7.09 and remains within the range seen in recent weeks.

Credit Ratings

Moody’s did not change its credit assessment of Italy or Greece’s sovereign ratings at the end of last week. Moody’s gives Italy the lowest investment-grade rating. Recall that the ECB has indicated that it would ignore rating downgrades until September 2021. Moreover, the ECB accepts the highest rating of the top four agencies. DBRS gives Italy a high BBB rating. However, before the weekend, it cut the trend (outlook) to negative from stable, citing the deterioration of the government’s balance sheet.

The fallout from the German Constitutional Court ruling last week continues. Over the weekend, EU President von der Layen threatened to sue Germany over the verdict. The ECB is undeterred. The German court did not rule on the Pandemic Emergency Purchase Program, a 750 bln euro effort that is not bound by the capital key. However, press reports indicate that lawsuits are being prepared. Separately, ECB President Lagarde estimates that EMU members will be issuing 1-1.5 trillion of new bonds. Most seem to expect the ECB to expand its PEPP buying in the upcoming meetings by 250-500 bln euros.

The euro remains pinned near $1.08, where a nearly 900 mln option is set to expire today. There is also an option at $1.0850 for one billion euros that also will be cut today. Between the two, it likely marks the range. Sterling is finding support around $1.2350 in the European morning, and the intraday technicals are stretched, suggesting potential for a bounce in early North American activity. Initial resistance is seen near $1.2400. The dollar is slipping against the Turkish lira following the reversal of last week’s decision to ban three banks (Citi, UBS, and BNP).


The implied yield of the December 2020 Fed funds futures rose by 2.5 bp ahead of the weekend to pop back above zero, despite the simply dreadful jobs data. The yields through May 2021 also moved out of negative territory. Federal Reserve officials have repeatedly rejected such a course. Fed Chairman Powell will discuss “current economic issues” on the internet on Wednesday and is expected to push back against such speculation. Some hedgers may seek protection from the low probability but high impact possibility.

Others might look at it as on a risk-reward basis, without attaching any special value attached to the zero bound. It is just “betting” on the chances of another rate cut. At the same time, the Federal Reserve signals that it recognizes that financial conditions are continuing to improve as it reduces the amount of Treasuries it will purchase this week will be $7 bln a day, down from a peak of $75 bln a day. Meanwhile, after the employment data, the Atlanta and NY Fed GDP trackers were revised sharply lower for Q2 to -34.9% and -31.2%, respectively.

The data highlight this week include the US April CPI retail sales (tomorrow) and retail sales and industrial production figures (Friday). The week, the US Treasury sells more than $90 bln in coupons for its quarterly refunding, which includes a 20-year bond. Canada has a light calendar, while the highlight of Mexico’s is the central bank meeting on May 14. The overnight rate is at 6.0% now, and at least a 50 bp cut is likely to be delivered. Ahead of the meeting, Mexico reports March industrial output (expect around a 4% decline on the month) and April job creation (after a loss of 130.6k jobs in March).

Before the weekend and again today, the US dollar found good bids near CAD1.3900. Initial resistance is seen near CAD1.40, which is about the middle of the recent range. The Canadian dollar is more sensitive to the risk environment (equities) than the price of commodities (oil proxy). Near MXN23.55, the US dollar was at the lower end of its recent range against the peso. After falling for the last two sessions, the greenback is firm. Initial resistance is seen near MXN24.00 and then MXN24.15.

This article was written by Marc Chandler, Marcto Market.

Positioning the Secret Sauce for Further Gains in Risk

S&P500 and NAS futures opened a little lower, but have come roaring back with Asian equities firing up nicely, despite selling in crude futures.


Certainly, the MXN has worked well of late, and it feels like in the absence of a pullback in stocks and a further reduction in implied vol that USDMXN heads for 23. EURMXN could push through the 50-day MA (25.64) amid the favourable environment for carry positions, although, much still depends on price action in crude which, as I say is giving back some of last week’s 25.1% rally. I also went short EURAUD as a trade and feel the downside has opened up nicely here – here is my trade rationale.

AUDUSD continues to have lock-on on the S&P500 futures, with the US equity benchmark putting on 3.5% last week, dwarfed only by a 6% and 5.5% rally in the NASDAQ and Russell 2000, respectively.

AUDUSD daily – pushing the 100-day MA
AUDUSD daily – pushing the 100-day MA


On the daily, the S&P500 will be eyeing a break of the 29 April high of 2954 and from we make an assault at 3000, which is obviously the round number, but the 100- and 200-day MA also sit here too. We are also told this is the line, where the CTAs (trend-following funds) flip to increase long positions in S&P500 futures, a development that could take us materially higher.

Looking at 5-day realised volatility in the S&P500, we see it has come down to 16.4%, from a high of 176% (17 March) and we’re back to pre-crisis levels and one suspects if vol sellers push the VIX closer to 20% (currently 27.98%), vol-targeting funds then enter the fray too.

White – S&P500 5-day realised volatility/RV, orange – 30-day RV

Source: Bloomberg

This, again, would be positive for risk FX such as the NOK, AUD, NZD, MXN and ZAR.

I have been guilty of not wanting to chase this rally in equity indices, but the lack of any follow-through in the selling (pick up in vol) has certainly lowered the impulse to short risk. I do see us moving past peek stimulus inspiration, with the Fed’s balance sheet growing at an ever-slower pace, as they do for other central banks, although the commitment to do more should we see a second wave in the corona virus is key.

On the fiscal side, the US House is due to vote on a Phase 4 bill on Thursday, rumoured to be close to $750b, and it’s uncertain that will pass, with Trump making it clear he wants to tie this in with a payrolls tax cut.

It is also clear that this is not a time for thinking too intently about valuation, with the S&P500 commanding an incredible 23.06x 2020 earnings, while 2021 FY earnings sit at 18x – economics have not played into considerations either. These are markets boosted by actions from the Fed to support credit and liquidity more broadly.

Re-positioning from hedge funds, specifically the systematic and rules-based crowd has been key and will be the reason, if it happens for new highs in US equity markets.

Consider that cash in money market funds, the safest of safe, has grown 30% since March, so there is still a ton of cash on the sidelines.

We can also look at the futures position in S&P500 futures held by non-commercial players and see this held net by short 222k contracts – that’s the largest net short positions held since 2015 and over two standard deviations of the 10-year average.

Total US$ value in money market funds

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Source: Bloomberg 

The disconnect between economic reality and valuation is keeping a lot of discretionary players from entering the market here, and that is fair as it feels incredibly wrong to buy risk – I guess that is one of the many reasons why a systematic approach can work in one’s favour.

So, we watch the S&P500 and NAS futures through Asia, where both markets were down smalls early doors and are coming back to the flat line as I type. There is little to trouble on the data side, although tomorrows (22:30aest) US CPI could be interesting with headline expected to drop 0.8% MoM and core -0.2%, amid a fierce debate on whether we get inflation or deflation as a result of COVID-19.

Retail sales (Friday 22:30aest) would typically get a strong look-in, and calls for an 11.7% decline won’t go unnoticed, but just as we saw with the 20m jobs lost in Fridays NFP and the failure to move markets; economic data at the moment is largely irrelevant, at least for markets – who will be looking intently on re-openings in the US and Europe, with plans to do so in the UK, Australia and others.

What could be important is the raft of Fed speakers this week, which you can see on the calendar below. Fed chair Powell mid-week speech will be the highlight, especially, with all the talk of negative rates that were priced into the rates market most intently on Thursday. In a crisis, you leave everything on the table, and things move so fast that what the central bankers say one day may not count the next. So, while Powell sits in the camp that negative rates are not warranted – he has been consistent on this message – it makes some sense for Powell to be vague enough to keep negative rates as a future option.

He can remove pricing from the fed funds future by lifting interest earned on excess reserve (IOER) by 5bp. However, with yields on 2- and 5-year Treasuries at record lows, in turn supporting sentiment more broadly, and reducing the appeal of the USD, it has pushed traders out the risk curve. Therefore, it makes sense for Powell to be somewhat vague on the subject.

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As the week rolls on front-end yields (2 and 5-year USTs) could matter for the USD this week and presumably for gold too, which maintains the 1738 to 1675 range. USDCNH continues to be a central focal point and barometer of sentiment towards the US-China relationship, while inflation expectations and implied vol continues to be central too.

Good luck to anyone trading the Bitcoin Halving today, with price trading lower into the event. It seems we are seeing a buy the rumour, sell the fact scenario play out before the fact it seems.

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Chris Weston, Head of Global Research at Pepperstone.

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Dollar Short Reduced; Swiss Franc Long Raches 2016 High

The risk-on seen during the previous weeks paused with the S&P 500, U.S. 10-year Notes and the dollar all trading softer. The dollar was nevertheless in demand against most of the ten IMM currency futures tracked in this, not least against the euro and Japanese yen. Exceptions being the Aussie dollar and the Swiss franc which reached a level of longs last seen in 2016.

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Hedge funds and other large speculators bought U.S. dollar for a second week to May 5. Buying against ten IMM currency futures were broad based resulting in the gross dollar short being reduced by 17% to $6.7 billion. The two exceptions being the Aussie dollar and the Swiss franc, with the long on the latter rising to the highest since 2016.

Biggest changes weighing the most on the sell side was the euro, which was sold for a second week, and the Japanese yen long which retraced after reaching a 13 months high a week earlier. Selling of the Mexican peso resumed despite rising 1.7% against the dollar.

Leveraged fund positions in bonds, stocks and VIX

The speculative short position in the C’Boe VIX futures was cut by 41% to 19k lots, an almost 15 month low. The reduction occurred despite a 4.6% rally in the S&P 500 Index driving a 12% drop in volatility. Interestingly the reduction was almost entirely driven by short positions being closed, potentially a sign of fading optimism that the stock market rally can continue.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.
This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire