The news out of Europe is grand
A virus response is now planned
Except for the fact
It’s not widely backed
It might draw a line in the sand

As well, what the data has shown
Is hope for the future has grown
Most surveys explain
The worst of the pain
Is past, though there’s much to bemoan

Equity markets continue to power ahead in most nations as the ongoing belief remains the worst of the damage from the global shutdowns is past, and that activity will quickly return to pre-virus levels given the extraordinary support promulgated by governments and central banks around the world. For example, Italian Consumer Confidence fell only to 94.3, a far better result than the 90.0 expected. Similarly, Eurozone Economic Confidence edged higher, to 67.5 from April’s revised 64.9 reading, also offering the chance that the worst is behind us. In fact, we have seen this pattern repeatedly over the past several weeks, where May readings (Empire Mfg, Philly Fed, Michigan Sentiment) rebounded from the extraordinary levels seen in March and April, although they remain at levels associated with extremely deep recessions. And maybe, hopefully, that is exactly what this data means. The bottom is in and it is straight up from here. Of course, the slope of this recovery line remains highly uncertain.

This morning we have also learned a bit more detail about the last major economy to announce a support package, as the EU’s mooted €750 billion package will be combined with €1.1 trillion of additional spending by the EU from its own budget…over the next seven years. That’s right, the EU has determined that the best way to support its member nations in the midst of a crisis is to promise to spend some additional money for nearly the next decade. And when you do the math, this stimulus adds up to less than 1% of the EU’s annual GDP, by far the smallest effort made by any major government. Adding injury to this insulting package is the fact that it remains highly uncertain as to whether even this can get enacted.

Remember, the underlying problem in Europe remains that the frugal north has been unwilling to support the profligate south. In fact, the telling comment was from a Dutch diplomat where he said, “Negotiations will take time. It’s difficult to imagine this proposal will be the end-state of those negotiations.” So, the headline spin is Europe is finally getting around to putting up some economic aid directly to those nations in greatest need. But the reality remains far from that outcome. Markets, of course, are happy to believe the words until they are proven wrong, but history suggests that the promised €1.85 trillion in total aid will actually be far less than that in the end.

Will it matter if the money never comes? Perhaps not. Perhaps, the natural course of events will see growth start to pick up again and demands for government support will fade into the background. Of course, it seems equally likely that EU support will be delivered by flying pigs. But hey, you never know!

Turning to markets now, risk remains the place to be for investors as equity rallies continue unabated. After another standout performance in the US yesterday, Asia did well (Nikkei +2.3%, Australia +1.3%), except for Hong Kong, where the Hang Seng fell 0.7% after the Chinese National People’s Congress approved (by 2,878-1) the measure allowing China to crack down directly on Hong Kong’s citizens regarding subversion, secession and terrorism, if deemed to be necessary by Beijing. This has opened yet another front of disagreement between the US and China and simply served to elevate tensions further. As yet, the situation remains a war of words and financial actions (like tariffs), but the situation appears to be edging closer to a point where a more kinetic outcome is possible. If that were the case, you can be sure that Covid headlines would become page 6 news and markets would need to reevaluate their current bullish stance.

Meanwhile, European markets have responded positively to the promise of EU support with all markets there higher by between 0.5% (DAX) and 1.7% (Italy’s FTSE MIB). This makes perfect sense as Italy will certainly be the largest beneficiary of the EU program while Germany will simply be picking up the tab. And finally, as I type, US futures are mixed with the Dow higher by 0.5% while NASDAQ futures are lower by -.4%.

Interestingly, bond markets around the world have rallied alongside stocks with yields edging lower in the US, 10-year Treasury is down 1 basis point, but seeing much greater price gains (yield declines) throughout Europe where France (-5bps), Spain (-4bps) and Greece (-3.5bps) are leading the way. Even bunds have seen yields decline, down 2.5bps, on the back of ongoing weakness in German regional CPI readings.

And what of the dollar, you may ask. In truth, today is the very definition of a mixed session. In the G10, four currencies have edged lower by about 0.1% (CHF, NOK, CAD, AUD) while two have edged higher, SEK +0.2%, NZD +0.1%, and the rest are essentially unchanged. With movement this small, there is no specific story driving things.

The EMG bloc has seen a similar split with gainers and losers, but here there has been a bit more substance to the moves. The worst performer is Turkey, with the lira down 0.6% after data showed Central bank borrowing continued to increase as the country tries to stockpile hard-currency reserves. But we also saw KRW decline 0.45% after the BOK cut rates to 0.50%, a new record low, and promised to do even more if necessary, implying that QE is on the table next. On the plus side, CZK has been the biggest gainer, up 0.4% after their government financing auction drew a bid-to-cover ratio of 10.72, demonstrating real demand for the currency.

On the data front, we see a great deal here at home as follows: Initial Claims (exp 2.1M), Continuing Claims (25.7M), Durable Goods (-19.0%, -15.0% ex transport) and Q1 GDP (-4.8%) all at 8:30. With the market clearly looking forward, not back, despite what will certainly be horrific data, it seems unlikely that there will be much reaction unless there is a real outlier from these expectations. Remember, the working assumption is already that Q2 GDP is going to be record-breaking in its depths, so will any of these really change opinions? My guess is no.

Overall, the dollar has been under pressure for the past two weeks and as long as risk appetite remains robust, I think that situation will apply.

Good luck and stay safe
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