June 8, 2020 / 8:36 AM / a month ago

Daily Briefing: Controlling that other curve

While most of the talk of late has been about flattening coronavirus infection curves, another curve has been grabbing markets’ attention.

FILE PHOTO: A trader adjusts his mask as he works on the floor of the New York Stock Exchange, May 28, 2020. REUTERS/Lucas Jackson

From pricing U.S. interest rates going negative a few weeks ago, the focus has shifted to the rise in Treasury yields, with 10-year borrowing costs at 0.9%, the highest since March 20. And the spread between two- and 10-year yields --  an indicator of economic expectations – hit its steepest since February 2018.

With the U.S. Fed meeting this week, attention is squarely on whether yields are rising fast enough to worry the central bank into implementing yield curve controls. Most reckon it won't happen this week, but the issue will almost certainly be discussed.

The catalyst for the latest steepening was Friday’s payrolls data, helping to push the 2-10 curve some 16 bps steeper than Thursday’s close. That data fed hopes of swift economic recovery, with 2.5 million jobs added in May and unemployment falling.

Yields are flat today, while German yields are a touch lower too, easing from more than 2-month highs. The German 2-10 curve too has steepened too, hitting 33 bps last week from around 20 bps at the end of May.

Today’s Chinese data has brought us back to earth — exports fared better than expected but the 16.7% tumble in imports versus a year earlier was the worst since January 2016.

The figures confirm domestic recovery will be a slow business. But they also have potential to stir up trouble — China’s trade surplus has swelled to a record $62.93 billion — the highest since Reuters started tracking the series in 1981 and almost double forecasts for a $39 billion surplus.

That could attract U.S. President Donald Trump’s ire. Reuters calculations show the surplus with the United States widened to $27.89 billion in May.

Chinese blue-chip shares are up 0.6% however, amid stimulus hopes. But after Asian shares played catch up with Friday's 2%-plus Wall Street gains, the mood has soured a bit - world stocks are flat and U.S. equity futures are up just 0.2%. A negative open too in Europe, but emerging stocks added 0.3%, extending their longest winning streak since April 2019.

The dollar is near 2-1/2 month lows – the euro is flat, possibly awaiting further news on the recovery fund proposal before Thursday’s meeting of EU finance ministers. We also had some pretty dire data from Germany showing the steepest plunge on record in industrial output.

European equities are down but following JDE Peet's recent bumper IPO, private equity's 3 billion-euro takeover offer for Spain's MasMovil, we now have a possible mega-merger between AstraZeneca and U.S. rival Gilead. That Bloomberg report has sent AstraZeneca shares down 2%.

But the newsflow also suggests some deep troubles. Volkswagen is considering more cost cuts, and calls for a strike at ArcelorMittal's Italian steel plant remind us of the thousands of jobs that won't necessarily return.

BA, Ryanair, and easyJet warned against a UK quarantine plan for travellers. Also, in another sign of anti-globalisation trends, Britain is preparing laws against some foreign takeovers.

Some bright spots: Munich Re's Ergo unit will enter China's insurance market with a stake in Taishan Property & Casualty Insurance. Husqvarna, the world's biggest gardening power tools maker, said market conditions have improved as pandemic restrictions ease.

Finally, oil prices have rebounded firmly over $40 a barrel after OPEC and its allies extended record production cuts until end-July. On the flip side, safe-haven gold is at one-month lows, licking its wounds after Friday’s 2.4% slump.

— A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own —

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