Euro hits 4-month high as EU talks drag on

The euro is at a 4-month high as EU leaders continue to talk after 3 days of meetings in Brussels in an effort to get agreement on a rescue package for countries hardest hit by the pandemic. The frugal four are holding out and have a new ally in Finland, so make that the Frugal Five Get the EU into Trouble, if there is ever a book written about it. Hungary and Poland are also unhappy about tying aid to the rule of law. Hungarian Prime Minister Viktor Orban pointedly blamed the ‘Dutch guy’, meaning Dutch PM Rutte, and threatened to veto rule of law of conditionality. 

 

EU Council President Charles Michel is touting a new deal with €390bn in grants, after the Frugal Five proposed a €700bn fund split equally between loans and grants which fell well short of what most other countries are hoping for. This is already down from the €500bn first imagined by Macron and Merkel. 

 

Clearly cohesion is weak, but the EU is usually capable of working out a fudge of sorts. Talks are due to start again later today at 4pm Brussels time with early indications that the ‘frugals’ are prepared to accept the €390bn idea. The biggest hurdles are the size of grants and the conditions attached to the money.  

 

The euro has made fresh highs above 1.14, with the move to 1.14670 this morning the highest since EURUSD has printed since March. With the euro marking a 4-month high it looks like traders are expecting some kind of deal is done, even if it falls short of the original plan. As noted last week, this not an ordinary summit – what’s being talked about is mutual debt issuance for the first time. A deal would mark a breakthrough for the EU and show that the bloc can respond to an era-defining crisis with one voice. Failure today is not the end of the road by any means, but it could produce a negative reaction in Euro-area sovereign debt, European equities and the euro. 

 

European equities were softer on the open on Monday as the bailout fund talks loomed, with the major indices edging almost 1% lower to retest the lower end of last week’s ranges. The FTSE 100 tested the 50% retrace of the June range at 6220. US equities finished mixed on Friday as the S&P 500 and Nasdaq rose a touch and Dow fell slightly. Chinese equities bounced but Asia was otherwise fairly flat. 

 

Pfizer and BioNTech have agreed a vaccine deal to supply UK with 30m doses should their candidate prove successful. Hopes for a vaccine continue to underpin positive equity market sentiment despite signs of a slower recovery than the V-shaped rebound everyone had hoped for. Much hope is being pinned on a candidate vaccine being developed by AstraZeneca and Oxford University – results from phase one clinical trials are due today and could set the tone for the rest of week in equity markets. New cases in the US and globally continue to soar but hope for a cure wins over the idea of a fresh lockdown. AstraZeneca shares hit a record high this morning ahead of the results. 

 

Treasury yields were softer as markets eye the rising case numbers in the US – Friday marked a fresh record 77k new cases, whilst efforts to roll back the easing of lockdown restrictions in states like California could result in some high frequency data like initial jobless claims taking a turn for the worse.

 

Gold is well supported and trying to break above $1810 as US real rates (10yr TIPS) moved even deeper into negative territory at a new seven-year low of -0.82%.

FX update: Pound blown off course by Frosty Brexit talks, euro tests 200-day line

Sterling got a smack and the euro pulled back from its highs of the day as Britain’s chief Brexit negotiator confirmed what we already knew; that UK-EU talks are not going very well at all. Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic.

GBPUSD moved sharply off the 1.23 handle, turning lower to test 1.2250 before paring those losses. EURGBP pushed higher and looked towards the May 21st swing high at 0.90, a two-month peak. Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the Covid-19 pandemic and back into the cut-and-thrust of negotiations.

Speaking to MPs, Frost said the EU’s current mandate handed to chief negotiator Michel Barnier is – in certain key areas –  not likely to produce an agreement, adding that the EU must change its stance in order to reach a deal with the UK. He said that the policy enshrined in the EU’s mandate is not one that can be agreed by the UK. Interesting to see sterling come back a touch as Mr Frost said it’s still the early stages of talks and the UK is still setting out its position – this seems rather optimistic given the timelines previously mentioned.

Whilst we knew that there had been precious little progress in the latest round of talks, the language indicates the two sides are very far apart still. We should however note that adopting this tone is part of the game – the UK’s position remains to take a hard line and, with Mr Cummings still in place, I would think this will remain the case. When questioned, Mr Frost said he reports to the PM, not to Mr Cummings. Of course, we all know where the real power lies.

As previously noted time is running out fast for the talks and we become less sure that either side has the political will and capital to expend on this when dealing with the economic catastrophe of the pandemic. The EU focus is on sorting out a rescue fund that all members can sign up to. Political capital is being spent on that more readily.

Chatter around the Bank of England looking at negative rates is another weight on sterling right now. Indeed it’s a crossroads moment as we deal with a massive increase in government debt, run huge twin deficits and exit the EU whilst in the midst of the worst global recession since the 1930s. There are a lot of downside risks for GBP.

Chart: Pound under pressure: EURGBP moves up to test near-term resistance, GBPUSD drops sharply

Meanwhile, EURUSD also pulled back from its highs, before recovering the 1.10 handle. The euro had earlier moved higher and European equities extended gains after the European Commission laid out plans for an additional €750bn stimulus fund. Ursula von der Leyen set out plans to distribute €500bn in grants – as per the Franco-German proposals – with an additional €250bn in loans on top. She said this would take the EU’s total recovery fund to €2.4 trillion.

A German government spokesman said Berlin was happy the EU had taken up elements of the plans set out last week by Angela Merkel and Emmanuel Macron. Macron urged the EU to move forward quickly. But a Dutch official said budget talks would ‘take time’, indicating a still rather frosty approach to the rescue fund from certain corners – it’s far from a done deal.

Chart: EURUSD analysis

The EC plans took the cross through the 200-day simple moving average around 1.1010 but there was not an immediate follow-through and the Brexit chatter knocked it back before it retook the 200-day line. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

Macron and Merkel’s rescue fund: Europe’s Hamiltonian moment?

Germany and France have agreed to push for a €500bn EU fund to help member states combat the economic fallout of Covid-19. The proposal comes as EU leaders fail to reach a consensus over what form a rescue package should take.

Angela Merkel and Emmanuel Macron have backed the scheme to support the Eurozone economy, which would be in the form of grants not loans.

The stimulus will be funded by the European Commission borrowing money – ‘coronabonds’ in all but name. The EC could borrow money from capital markets on behalf of all EU nations, secured against the next seven-year budget. The debt would mature after 2027.

This is an important breakthrough for the EU and has been dubbed Europe’s ‘Hamiltonian’ moment, in reference to Alexander Hamilton, who federalised the debts of the various US states in 1790.

This week on Wednesday EU President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal.

If the budget talks are successful it should lower risk premia on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets.

It would also mark a major step towards EU fiscal policy coordination and possible fiscal union.

Will Eurozone members agree to rescue grants?

But it needs consensus and agreement from all the members of the common currency. Leaders struggled to agree an emergency funding package back in April, and the issue of how to support the recovery once the health crisis had passed was left alone.

Some nations have argued that making any rescue funding into a loan means saddling more debt on member states, like Italy and Spain, that are already struggling with their existing liabilities.

The ‘frugal four’ – Austria, Denmark, the Netherlands, and Sweden – are not playing ball with the French and Germans, putting forward a counterproposal to the €500bn bailout fund.

The four countries said they would not agree to a mutualization of debt, nor an increase in the EU budget.

Budget talks over the next few weeks will be crucial to the Eurozone and its economy.

For more, follow Helen Thomas from BlondeMoney here on XRay for weekly video updates and sign up for bespoke research analysis on how EU politics is driving financial markets.

Euro wobbles ahead of German court ruling, risk appetite improves

Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes.

 

It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low.  The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.

 

EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling. 

 

European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb. 

 

The Reserve Bank of Australia left rates on hold at the record low 0.25% and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks. 

 

Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6% and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97% to just 4,000 vehicles.

API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.

Chart: EURUSD wobbles

Stocks head lower after Gilead, EU disappointments

US stocks faded and European equity markets are broadly weaker following on reports Gilead’s Remdesivir drug isn’t what it was cracked up to be. It had been indications of early positive results for treating Covid-19 patients with the drug that sent markets up at the tail end of last week. We should note these are all leaked reports and the data is sketchy at best. What it shows is how the market is prepared to read into positive vaccine or anti-viral news with extreme optimism, setting the bar high for disappointment.

Data on the economy isn’t offering any disappointment – the bar is already so low that nothing can really be really upsetting. US initial jobless claims rose by more than 4m again, taking total unemployment claims to 26m from Covid-19. UK retail sales fell by a record 5.1% in March, but a drop of this magnitude was widely anticipated. Consumer confidence didn’t decline, but held steady at an 11-year low at -34.

Stimulus is being worked out. The US House of Representatives on Thursday approved the $484bn package for small businesses and hospitals.  More will be needed, you feel. Today’s data of note is the US durable goods orders, which are seen falling 12%, with the important core reading down 6%.

In Europe, Angela Merkel made sure Germany’s economic weight will stand behind a €1tn package for the Eurozone to prevent weaker economies from recovering a lot more slowly than richer ones. This will be defining moment for the EU – if it cannot pull together now, what is the point of it? Of course, there are still strong differences between nations on the actual size and nature of the fund. Critically, we don’t know whether cash will be dispensed as loans or grants. There was a definite sense from Thursday’s meeting of the EU kicking the can down the road. The problem for the EU and the euro is that we’re heading towards a world debt monetization and it cannot take part. German and Italian spreads widened.  Support needs to be agred – Lufthansa today says it will run out cash in weeks.

The euro continues to come under pressure on the disappointment and yesterday’s PMI horror show. Support at the early Apr lows around 1.07750 was tested as I suggested in yesterday’s note, which could open up a move back to 1.0640 without much support in the way.

Heading into the final day of trading for the week, the UK was outperforming – the Dow down 3% this week, while the FTSE was about 0.7% higher. The FTSE 100 shed about 100 points though in early trade Friday to give up its 5800 handle and head for a weekly loss.

Overall, it’s been a pretty indecisive week for indices with no significant developments in terms of the virus or economic data. It’s interesting that in terms of earnings releases, we are not seeing much other than a huge amount of uncertainty as companies scrap guidance. American Express is the main large cap reporting today. It’s already warned that Covid-19 would hit payments as lockdown measures force people to stay home. The momentum of the rally from the trough has faded this week and could see stocks roll over next week if there no more good news. It’s either a bullish flag pause, or a roll over to be signalled by a MACD bearish crossover. The question is do you think stocks should be down 10% or 20% from the all-time highs?

DAX: momentum fading

S&P 500: 50-day SMA proves the resistance with 2800. Watch the MACD.

Oil is proving to be more stable. Oklahoma’s energy regulator has said producers can close wells without losing their licences. Donald Trump started to look desperate, stoking tensions with Iran. You would not be surprised if it were a dastardly plan to boost oil prices. Treasury Secretary Mnuchin suggested the White House was looking at a bailout for the oil industry.

Today’s Baker Hughes rig count will be closely watched to see how much production is being shut in. Last week’s figures showed the sharpest decline in active rigs for 5 years, falling 66 to 438, around half the number drilling for oil the same time a year ago.

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