Economic data turned up sharply in May, while the prospect of more fiscal and monetary splurges is stoking investors’ risk appetites. Last week, cyclical sectors and stocks – those which took the worst hit during the lockdown – continued to build on earlier gains. The European banks index soared by 20%, driven by abundant liquidity and renewed steepening on yield curves. Oil companies were also in demand. Despite high stock multiples and the prospect of earnings downgrades, liquidity from central banks continues supporting markets.

Spooked by possible deflation, the ECB last Thursday increased the size of its Pandemic Emergency Purchase Programme (PEPP) by EUR 600 billion to EUR 1,350 billion and extended it to June 2021, while also stating that the proceeds from maturing issues would be reinvested. The ECB is especially scared of a sharp decline in Eurozone GDP. In the bond market, massive inflows led to tighter credit spreads in investment-grade and high-yield segments. Long-dated yields on government bonds have risen across the board (10-year US Treasury at 0.92%). Spreads on peripheral sovereign debt also narrowed.

The US jobs report for May took investors by storm. Job additions clocked in at 2.5 million whereas the consensus had expected the economy to shed 7.5 million jobs. The unemployment rate fell to 13.5%. No doubt it will take time for analysts to come to terms with their gigantic forecasting blip as they try to make sense of the numbers. One explanation may lie in the discrepancy between the 43 million initial jobless claims and the 21 million who actually receive any benefits. This will need to be followed up. But in the meantime, risk assets have the wind in their sails. The Fed meets this week and is not expected to renege on its largesse.

OPEC last week agreed to extend production cuts by 10m barrels per day and will strengthen checks on the many who game the system by not respecting quotas. If everyone does stick to the plans (which is rarely the case), this will pave the way for more cuts to absorb the backlog of reserves run up during the Covid-19 pandemic and restore the minor supply gap in the market.

Lastly, the plunge in Germany’s industrial production – 25.3% year-on-year in April – startled observers as the lockdown took its toll on the economy. China booked a record trade surplus in May (USD 62.9 billion vs. the USD 41.4 billion expected). Exports fell by 3.3% and imports – reflecting lower oil prices – dropped by 16.7% year-on-year.
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