Capital Markets: "Will Powell have any more Luck Pushing against Negative Rate Expectations in the US?"

From Marc to Market:

Overview: Another late sell-off in US shares, this one perhaps related to the sobering assessment by the leading medical adviser for the Trump Administration about the risks of opening too early, failed to deter investors in the Asia Pacific region. Although Japanese shares slipped, most other markets rose. 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.

Europe
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....

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