Morning Report – Tuesday 5th May

Main Headlines

A ruling from Germany’s constitutional court today is expected to pave the way for central banks to hold more of their own sovereign debt, freeing up headroom in bunds and allowing more QE buying and lower yields. However, there’s an outside chance judges may restrict deviation from so-called capital keys, a decision that would have repercussions for the ECB’s new Pandemic Emergency Purchase Program.

Oil’s rally extended for a fifth day, with WTI trading around $22, on optimism the glut may ease as explorers reduce US output and economic activity improves. Shares in Sydney were slightly higher and U.S. equity futures held gains after the S&P 500 rallied late in New York. Markets were shut in Japan, China and South Korea. Hong Kong stocks rose a day after data showed the economy shrank 8.9%. Gold was a touch lower.

As the world debates the costs and benefits of reopening economies, Sweden’s first-quarter GDP data may get more attention than usual. Recent gauges indicate activity held up pretty well in March after a positive start to the year. Consensus sees a 1% contraction on quarter, less severe than elsewhere.

GBP

Boris Johnson’s attempts to find a way to revive the battered U.K. economy while halting the spread of coronavirus ran into flak from his opponents and allies as he prepared to announce his plans. We are only in early May and the pound has already seen its entire April rally eradicated. Sterling could be in for a particularly testing time. May has been its worst month every year since 2010 with an average decline of 2.3% against the dollar. That adds to previously mentioned headwinds for the pound which is already contending with the economic shock from the pandemic as well as drawn-out Brexit uncertainty.

EUR

Unless the German Constitutional Court rules against the European Central Bank’s asset purchases, this year could end with close to 1 trillion euros being printed to finance income support in countries that can’t afford it. Once the crisis phase of the coronavirus pandemic passes, the consequences of expansive asset purchases for policy and inflation could be significant. This fiscal QE  – the main monetary instrument the ECB are using to deal with the pandemic – will absorb the lion share of public debt issued this year. The euro is rangebound ahead of the court ruling.

USD

Positive virus news helped sentiment. New infections in the U.S. slowed to 2%, the lowest since March, and California Governor Gavin Newsom said he’ll begin loosening the state’s lockdown on Friday by allowing stores to sell items such as books, clothes and flowers through curb side pickup. Arizona also will ease Friday, when salons and barbers among others can open their doors. The daily toll fell in New York and Texas but spiked off a low base in Nebraska. A gauge of dollar strength weakened for first time in three days on this news.

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

• 8:00 a.m.: Spain April unemployment
• 9:00 a.m.: German Constitutional Court rules on ECB’s QE program
• 9:30 a.m.: U.K. April Services, Composite PMI
• 10:00 a.m.: Euro-Area March PPI

Corporate Events

Earnings include Disney, DuPont, Total, Dominion Energy, Siemens Healthineers, BNP Paribas, Intesa, Vonovia, Beiersdorf, Repsol, Fiat Chrysler, HelloFresh, Occidental, Marathon Petroleum, Suncor Energy

Corporate Highlights

• AmerisourceBergen proposed paying about $6 billion to buy the drug distribution unit of Walgreens Boots.
• BNP Paribas warned 2020 earnings will be down by as much as 20% after taking a $1.2 billion virus hit.
• Infineon forecast full-year revenue of about 7.6 billion euros, citing a significantly weaker outlook.
• Disney highlights the upcoming earnings slate. The company’s parks are closed and it’s had to delay film launches like Mulan, and Disney+ will only do so much to offset that.