Market Commentary – June 26, 2020

Kevin Jock

26th June 2020

     Asian Equities trade Up, Mainland China celebrates day two of the Dragon Boat Festival. Markets see increased volatility and increased concerns of the impact of new coronavirus cases. Yesterday pulled away slightly from risk-off trading seen earlier in the week.

     Risk appetite saw some recovery towards New York close. On the US data front, those receiving unemployment benefits dip below 20mio (still high).  Data should improve with the economy reopening. The Fed announced a few key changes: Large banks cannot increase dividends or resume buybacks no earlier than Q3 (maybe longer). There will also be changes to the Volcker rule that will change how banks can interreact with hedge funds and private equity funds. The change will be effective on October 1, 2020.

     Recent ECB Monetary Policy Meeting Accounts illustrate two main drivers for boosting the size of the QE bond purchase program from 750bn to 1350bn. Somewhat larger boost than market expected. First factor being downward inflation revisions weigh heavily by increasing economic slack and lower energy prices. Second reason being tightening financial conditions. Whilst risk-free rates have shifted downwards, the effect has not been fully transmitted across broader asset prices and yields with corporate and bank yields instead experiencing upward pressure.

Figure 1 (source: Refinitiv Eikon): Brexit, Covid 19 concerns and increased demand for USD keep GBPUSD in the headlines. The pair trades lower.


     Banxico, The Bank of Mexico, cut key interest rate by 50 basis points to 5.00%. The rate was cut to near 4-year lows over growth concerns and covid19 uncertainty. The bank commented saying “the balance of risks for growth remains significantly biased to the downside.” The IMF predicts the Mexican economy could shrink by 10.5% this year. Also, Mexico’s Finance Minister has tested positive for COVID.

Figure 2 (source: Refinitiv Eikon): MXN nears one month lows on back of Banxico’s decision to cut interest rates by 50bps. Little change was seen on the USDMXN from the CPI print earlier this week. USD/MXN will be key to watch closer to the U.S. elections.

     The Central Bank of the Republic of Turkish’s concerns of upward pressure on inflation has lead the central bank to go against expectation of an additional rate cut and hold key interest rates at 8.25%, after nearly a year long easing cycle.


Headliner Review

  • Juxtaposing news coming out of the US. Though durable goods saw a sharp rebound from -17.7% to 15.8% MoM, unemployment claims held firm last month at 1.48M disappointing analyst consensus (1.32M). Recent record-breaking infection rates across states will most definitely put a dent in current optimistic forecast for coming months.
  • Much like Crude Oil inventories, Natural Gas storage increased beyond market sentiment. Expected figures being 108B, announced at 120B. Lethargic economic production and a worrying ‘second-wave’ slowed global output.
  • Three main measures will be implementing during the third quarter this year after yesterday’s Federal Reserve stress test results. Additional sensitivity analysis accounting for the current coronavirus shock placed most banks well capitalized but several approaching scarce capital levels. To preserve capital, share repurchases will be suspended, dividend payments capped and with dividend amounts formulated based on recent incomes only.


Up Next

     Focus will remain on COVID-19 and Geopolitics given little data due today. The little data we have today comes from NOK and SEK Retail sales, US personal income/spending, May PCE figures and some economic data out of Mexico. The University of Michigan consumer/inflation sentiment prints.

     RUB remains key to watch, as posted in yesterday’s commentary, voting begins today in the proposed constitution changes: RUB will be in focus in the coming week for announcements on how the proposed 200 constitutional changes will impact daily life in Russia. One key change will decide if President Putin may pursue an additional two more six year terms after his presidency is due to end in 2024.

Headliners to watch

  • US Core PCE Price Index m/m expected to increase from -0/4% to 0%.
  • US Personal Spending m/m expected to rebound from -13.6% to 8.9%.
  • US Personal Income m/m expected to drop from 10.5% to -6%.
  • US Revised UoM Consumer Sentiment expected to increase from 78.9 to 79.1.

Chinese banks are off again today as they celebrates day two of the Dragon Boat Festival.


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Antony Tan
Ben Li
Kevin Jock