1/TALE OF TWO CURRENCIES
The euro suddenly looks unstoppable, hitting 21-month highs above $1.16 after the European Union set aside differences and agreed a COVID-19 recovery fund. This signal of solidarity, combined with monetary and budget stimulus, could propel the currency to $1.20, some predict.
The optimism should take the sting out of upcoming German and euro zone second-quarter gross domestic product data, expected to show steep contractions amid the coronavirus hit.
Euro gains stem partly from dollar woes; coronavirus outbreaks across the United States and tensions with China have set the greenback on track for its worst month since Jan. 2018.
One hitch: In nominal trade-weighted terms, the euro is now above 2018 peaks. If exports take a hit, euro strength won’t sit well with policymakers.
Graphic: Trade-weighted euro vs the – https://fingfx.thomsonreuters.com/gfx/mkt/jznvnkzzepl/theme2407.png
2/DOWN AND OUT IN CHENGDU AND HOUSTON
U.S. diplomats are clearing out of the Chengdu consulate after their Chinese counterparts were ordered to quit Texas in the latest round of tensions. Markets sold the moves, but not too much because nobody’s mentioned tariffs.
Yet caution is warranted. This represents a big push towards de-coupling with Mike Pompeo saying the “old paradigm of blind engagement” is done.
Currency markets are advising care; the yuan had its steepest three-day selloff since late March and the U.S. dollar is tanking for the fourth straight week.
Graphic: US-China tensions – https://fingfx.thomsonreuters.com/gfx/mkt/nmopaljkxva/Pasted%20image%201595576726782.png
3/$2 TRILLION TECHIn 2018, Apple (O:) became the first U.S. company with a $1 trillion stock market value. Microsoft (O:) and Amazon (O:) joined the club last year. Now the race is on for a $2 trillion market cap.
Microsoft’s disappointing second-quarter earnings shifted the focus to Amazon and Apple, which both report on Thursday and have seen shares soar this year, thanks to strong demand for products and services from people staying at home during the pandemic.
Apple’s 32% surge in 2020 increased its market capitalization to $1.65 trillion, Microsoft is snapping at its heels at $1.56 trillion, while Amazon is at $1.51 trillion.
Two others in the FAANG quintet, Facebook (NASDAQ:) and Google parent Alphabet (NASDAQ:), also have results coming up. But they are out of the race: the latter just barely squeezes into the trillion-dollar club.
Graphic: Wall Street’s tech triumvirate advances – https://fingfx.thomsonreuters.com/gfx/mkt/xegpbayxwvq/Pasted%20image%201595524780091.png
After slashing interest rates to near zero and engaging in huge asset buying, the U.S. Federal Reserve will probably sit on its hands at the July 28-29 meeting.
Markets are seeking clues on its next move. The Fed doesn’t seem keen on yield curve control or negative interest rates. But if it wants to rely on asset purchases and forward guidance only, it might eventually need to expand QE, Fedwatchers reckon.
Also, this QE programme has spread purchases of Treasuries pretty evenly across the curve, while the last two rounds focused on the long end. Many predict the Fed will opt to up purchases in the 20- to 30-year bracket; that will keep in check the term premium – the extra return earned from holding long-term bonds.
Yet Fed Governor Lael Brainard recently mentioned the “thick fog of uncertainty” surrounding the U.S. economy. So for now, the Fed might just wait for that fog to dissipate.
Graphic: Fed balance sheet shrinks – https://fingfx.thomsonreuters.com/gfx/mkt/rlgvdnkqbvo/Pasted%20image%201595508818724.png
5/BANKING ON PROVISIONS
In the first quarter, Europe’s top 40 banks set aside 22 billion euros in provisions against loans going sour in the wake of COVID-19. As the second-quarter earnings season kicks off, focus is again on provisioning.
British banks set aside more in the first quarter than any other European country. Four of them — Barclays (LON:), Standard Chartered (LON:), Lloyds (LON:) and newly rebranded NatWest Group — will disclose more in the coming days.
Following the U.S. pattern, European investment banks should be cushioned by bumper earnings for their trading arms; Deutsche Bank (DE:) has already signalled better-than-expected profits.
There are fewer bright spots for retail and corporate-focused names. Spain’s Santander (MC:) and BBVA (MC:), with large Latin American arms, also face the double whammy of loan loss provisions and exchange rate impact. Graphic: Loan loss provisions by European banks, Q1 2020 – https://fingfx.thomsonreuters.com/gfx/editorcharts/nmopaneqkva/eikon.png