Equities broadly ended last week on a positive note after a few jitters with the S&P closing the week +1.88% (total return basis). The UST 10-year yield tightened 1bps over the week to 0.695% at Friday’s close, although it had retreated to 0.75% at Tuesday’s close. At the start of the week, a covid-19 outbreak in Beijing and some mounting cases in US states weighed on investor sentiment although as the week progressed risk sentiment improved helped by continued signs of central bank support and some better data points e.g. US May retail sales (+17.7% mom vs expectations of +8.4% mom).
The Fed announcement that it would begin buying individual corporate bonds through its Secondary Market Corporate Credit Facility, helped boost sentiment and Jerome Powell’s appearance before the Senate Banking Committee emphasised the importance of continued fiscal policy support. He commented: “It would be a concern if Congress were to pull back from the support that it’s providing too quickly,” and that “It would be wise to look at ways to continue to support people who are out of work and also smaller businesses that may not have vast resources for a period of time…so that we can get through this critical phase”. Talk of a USD1tn infrastructure spending package also helped lift sentiment. Elsewhere, on Thursday the BoE announced a £100bn increase to its bond buying program taking the Asset Purchase Facility target to £745bn. In Europe, the leaders met on Friday in a virtual summit to discuss the European recovery fund: no conclusions were reached with areas such as the split between loans and grants and the allocation of funds to member states being debated.
In Monday morning trading, European equity markets are subdued as a number of Covid-19 outbreaks (Beijing, US, Australia, Germany) weigh on sentiment causing fears of a difficult path out of lockdown and the possibility of a second outbreak. Over the week ahead, a number of flash PMI indices for June are due to be released with investors looking to see if they will build on some signs of improvement in May and whether they can move into expansionary territory. On Wednesday, the German IFO survey is also due to be released. Today, US existing home sales and the CFNAI index are a key focus while Luis de Guindos and Philip Lane will be speaking from the ECB. The updated economic forecasts from the IMF will also be a focus with investors mid-week: downgrades to forecasts are likely as last week Gita Gopinath, the IMF’s Economic Counsellor, warned in her blog: “The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated.” On Thursday the minutes of the ECB’s last meeting are due to be released with investors looking for more detail on discussion of areas beyond the announced increase to the PEPP buying programme. On Friday, US May personal income and consumption and the core PCE deflator data will be a focus.