Capital Markets: "Correction Scenario Tested"

From Marc to Market:

Overview: Shortly after the US stock market opened sharply lower, the Federal Reserve announced that it's Main Street facility was up and running. US stocks never looked back. After the S&P 500 recouped its full decline, the Fed announced it would begin buying corporate bonds. Up until now, it had been buying representative ETFs. Stocks rallied further on the news before pulling back into the close. The rally in risk assets carried into Asia. The MSCI Asia Pacific Index snapped a three-day slide and exploded higher. Despite a flare-up of tensions by North Korea, South Korea's Kospi advanced over 5%.

The Nikkei gained four percent, and Australia's ASX rose 3.9%. Indian shares gained the least with less than a 1% gain, possibly amid concerns over a new escalation in the border dispute with China. Europe's Dow Jones Stoxx 600 is extending yesterday's recovery and is up around 2.5% through the European morning. US shares are firm and poised to continue yesterday's recovery. Peripheral European bonds, led by Italy, are rallying alongside risk assets, while core bond yields are mostly edging higher. The US 10-year yield is near 73 bp. The dollar is narrowly mixed against the majors. Sterling's 0.35% gain leads, while more the majors are +/- 0.15%. The JP Morgan Emerging Market Currency Index is struggling to extend its two-day advance. Gold held support near $1700 yesterday and is hovering around $1730, where it finished last week. Oil recovered smartly yesterday, and the July WTI contract is bid today. It appears poised to challenge $38 a barrel and then last week's highs around $40.


Asia Pacific
The BOJ left its rate policy unchanged, though there was a single dissent (Kataoka) who wanted an immediate cut. The BOJ did expand its corporate support by boosting the funds earmarked to JPY110 trillion (~$1 trillion) from JPY75 trillion. Last month, the BOJ announced that it would make JPY30 trillion in interest-free loans to small and medium-sized businesses and JPY25 trillion for larger firms. This was in addition to the JPY20 trillion of corporate bond and commercial paper purchase target. BOJ Governor Kuroda suggested that it would be difficult for it to raise interest rates ahead of the US. While some observers have suspected this was the case, to hear it confirmed, was surprising and raises questions about the meaning of monetary sovereignty.

Geopolitical tensions in Asia rose. North Korea destroyed a liaison office with South Korea on its territory, apparently in retaliation for South Korea's pamphlet drop. However, North Korea is believed to be re-militarizing Kaesong industrial complex, and the destruction of the liaison office is seen as a step toward that. There was some weakening of the South Korean won in the non-deliverable forward market. India and China's forces clashed in the Galwan Valley as de-escalation steps were being taken. Reports suggest that at least three Indian soldiers were killed, while some reports suggest Chinese troops also suffered casualties. India's stocks underperformed in the regions, and the rupee retreated. It is the fourth consecutive session the rupee has eased against the US dollar....

....Europe
The UK's May employment looked bleak. Jobless claims rose by almost 529k after a revised 1.03 mln increase in April (initially ~857k). Earnings data and the unemployment rate are reported with an extra month lag. Tomorrow the UK reports May CPI and PPI ahead of the Bank of England meeting. The BOE is widely expected to boost its bond-buying program by at least GBP100 bln, a GBP200-GBP250 bln increase seems likely. There has also been increased talk that it may introduce yield-curve control, with some suggesting targeting the five-year rate at the same as the base rate (10 bp). Separately, the UK government and the EU seemed to soften their rhetoric about a new trade agreement, and Prime Minister Johnson said he wanted a deal by the end of next month....

....MUCH MORE