Morning Report – Friday 29th May

Main Headlines

The European Central Bank will step up emergency asset purchases next week to haul the economy out of its much deeper than originally anticipated slump. The expected top up of 500 billion euros would take purchases under all plans this year to 1.6 trillion euros. The increase will reinforce the ECB’s key role in rebuilding the 19-nation economy and shrug off concerns that a controversial German court ruling will constrain policy makers’ scope for action.

Donald Trump will unveil his new policies on China today after Beijing passed a law curbing freedoms in Hong Kong. “We are not happy with China,” the president said, adding a swipe related to the pandemic – “All over the world, people are suffering.” Economic adviser Larry Kudlow told CNBC Beijing made a “huge mistake” with the law and will be held accountable. Possible penalties range from sanctions to ending Hong Kong’s special trading status.

U.K. Secretary of State Dominic Raab said Britain will open a path to citizenship for 300,000 Hong Kong residents unless China backs down from its planned security laws. He said visa rights will be extended for overseas British National passport holders. Canada and Australia issued a joint statement with the U.S. urging Beijing to reconsider the security law.

Equities look like they will close out a strong week on the back foot as deteriorating China-American ties raise concerns over a rally spurred by reopening economies. Hong Kong equities led declines in Asia, while S&P 500 futures signalled more losses. Treasuries advanced with gold and the yen. WTI gave back most of yesterday’s gain to trade around $33 a barrel.

GBP

Sterling traded lower yesterday after Britain told the European Union it needed to break a fundamental impasse to clinch a Brexit trade deal by the end of the year. PM Boris Johnson will resume Brexit talks in person in Brussels next month, the Times newspaper reported on Thursday. The government insists it will not extend the transition period. Bank of England Governor Andrew Bailey said that the central bank was right to consider cutting rates below zero to give the economy an extra boost, but that careful thought would need to be given to the side effects of doing so. U.K. schools are due to resume from Monday, and people can gather in groups of up to six.

EUR

The euro is heading for its second weekly gain as the EU’s announcement of a 750-billion-euro coronavirus recovery fund fuelled optimism about the euro-zone economy. Overall inflation probably slowed in the euro-area this month. Consensus sees the flash CPI gauge decelerating to 0.1% in May. Consensus estimates core CPI slowing to 0.8%,

USD

The dollar is on course for a weekly loss against most major currencies as progress in lifting coronavirus lockdowns and stimulus plans in Europe weakened demand for safe havens, but the mood could quickly worsen tensions between US and China increase. The dollar is trading in a narrow range this morning as focus shifts to U.S. President Donald Trump’s response to China’s change of a national security law for Hong Kong.

Main Economic Data/Central Banks/Government (All Times BST)

• 7:00 a.m.: Germany April retail sales, import price index
• 7:45 a.m.: France 1Q GDP, May CPI, April PPI
• 8:00 a.m.: Turkey 1Q GDP, April trade
• 9:00 a.m.: Euro-Area April M3 money supply
• 9:00 a.m.: Italy 1Q GDP
• 9:30 a.m.: ECB’s Visco speaks
• 10:00 a.m.: Euro-Area, Italy May CPI