According to analysts, it was one of the most dovish Fed statements in history. It was also not enough to offset the Fed’s gloomy and uncertain outlook which sees unchanged rates until 2022 and an economy that fails to recover its 2019 highs for at least three years. As a result global stocks dropped the most in five weeks and US equity futures tumbled on Thursday not only on the Fed’s sobering outlook but also on rising signs that a second wave of the pandemic has arrived; bonds rallied on bets yet more stimulus would be needed to ensure recovery and the dollar ominously rebounded indicating that financial conditions are about to get tighter again.

The MSCI All-world index slid 0.75% in its largest daily loss in five weeks, while E-Mini futures for the S&P 500 fell 2% to extend the previous session’s pullback on Wall Street, sliding as lows as 3,100 a day after Powell suggested the pandemic could inflict long-lasting damage on the economy. Futures legged lower after the WSJ reproted that the EU is reportedly mulling formal antitrust charges against Amazon in the next week or two over treatment of third-party sellers, according to WSJ citing sources.

Market sentiment also took a hit as new coronavirus infections in the United States showed a slight increase after five weeks of declines, topping 2 million, but only part of which was attributed to more testing; this has led to fears of a second wave in Texas and Florida. Consider the following headlines from Bloomberg:

• Texas reported their highest 1 day new coronavirus cases total since the pandemic emerged
• A month after reopening, Florida reported the most new cases of any seven day period-to-date
• California’s hospitalizations are at their highest since May 13th, having risen in nine of the past 10 days
• Arizona’s daily tally of new cases has abruptly spiked in the last two weeks, hitting an all-time high of 1,187 on June 2

Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security said that “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but its coming.”

“This is the first time we’ve had a little bit of negative newsflow recently” on developments in the coronavirus, Dean Turner, economist at UBS Global Wealth Management, told Bloomberg TV. “Put that in the context of how far markets have come in the last few weeks, it’s not at all surprising that we get a little bit of profit-taking at this stage.”

U.S. virus cases now top 2 million, with fears of a second wave in Texas and Florida. Treasury Secretary Steve Mnuchin said the U.S. “definitely”needs more fiscal stimulus, supporting prospects for another round this summer. European policy makers meet Thursday on whether to boost aid.

Europe’s main bourses all opened with a heavy thud, with the Stoxx Europe 600 Index sinking, as sectors that were bought up in the recent rally such as banks and travel leading declines.  London’s FTSE, Frankfurt’s DAX and Paris’s CAC40 were all down more than 2.5% in what for coronavirus-sensitive sectors such as carmakers and travel and tourism was a fourth straight day of drops.

Asian stocks saw a 10-day winning streak come to an abrupt finish, the drop led by finance and energy stocks in Japan and Australia. Trading volume for MSCI Asia Pacific Index members was 12% above the monthly average for this time of the day. The Topix declined 2.2%, with DLE and Relia falling the most. The Shanghai Composite Index retreated 0.8%, with Beijing Urban-Rural Commercial Group and Shanghai Fenghwa Group posting the biggest slides.

In a reality check to the stock market’s recent euphoria, the Fed predicted the U.S. economy would shrink 6.5% in 2020 and unemployment would still be at 9.3% at year’s end.

Shortly after the latest inflation data showed core U.S. consumer prices fell for a third straight month in May, the longest stretch of declines on record, Fed Chair Jerome Powell said he was “not even thinking about thinking about raising rates”. Instead, he emphasized recovery would be a long road and that policy would have to be proactive with rates near zero out to 2022.

“While Powell did not commit to any new action at this time, his focus on downside risk and uncertainty reinforces the message that they will take further action, probably by September,” JPMorgan economists said. “Outcome or calendar-based guidance looks likely and Powell left the door open for moving to some form of interest rate caps.” Powell also confirmed the Fed was studying yield curve control, although he did not hint that a launch was imminent.

YCC is probably further away today after yields on 10-year Treasuries fall 9 basis points on Wednesday, the biggest daily drop in almost two months. Treasuries extended their rally, with the biggest advance in the long end of the curve, in the wake of the Fed’s signal that it would keep rates near zero for years to come and continue its bond buying at least at current levels. 10Y yields were down at 0.70% on Thursday, a sharp rally from last week’s peak of 0.96%. German Bund yields – the benchmark for Europe – duly followed. Their 10-year levels fell to an eight-day low in early trade at -0.37%, falling 4 basis points on the day.

In FX, the risk of more Fed easing initially had the U.S. dollar under pressure, seeing it touch a three-month low against a basket of currencies at 95.714. But it then staged a rebound back towards 96.500 as risk appetite waned and stocks came off.  The Bloomberg Dollar Spot Index bounced back above 1200 and the greenback advanced against most Group-of-10 peers amid a flight to safety. Commodity currencies, led by the Australian dollar and the Norwegian krone, were the biggest losers after renewed concern about the global economy and rising U.S. coronavirus cases sparked a selloff in risk assets; oil prices slumped. The yen advanced to a 4-week high versus the dollar and the Swiss franc rose to its strongest level since mid-March amid haven demand, while the pound was hurt by the risk-off tone. Sweden’s krona pared some losses after inflation came in higher than forecast.

Crude oil declined while gold faded some of Wednesday’s gain amid the rise in the dollar. WTI and Brent front month future conformed to the overall risk aversion post-Powell with added weight from a resurgence in cases State-side and ongoing questions regarding the enforcement of OPEC compliance among laggard producers. Fresh news-flow has been light for the complex this morning with price action more-so a continuation of downside from the US and APAC sessions. WTI Jul briefly breached USD 38/bbl to the downside (vs. high 39.09) multiple times but USD 37.90/bbl held as a support throughout the session thus far.

Looking at the day ahead now, data highlights include initial jobless claims from the US, along with May’s PPI reading. There’ll also be a video conference of the Eurogroup taking place. Adobe and Lululemon are among companies reporting earnings

Market Snapshot

• S&P 500 futures down 1.6% to 3,134.25
• STOXX Europe 600 down 2.4% to 359.47
• MXAP down 1.8% to 159.38
• MXAPJ down 1.7% to 512.93
• Nikkei down 2.8% to 22,472.91
• Topix down 2.2% to 1,588.92
• Hang Seng Index down 2.3% to 24,480.15
• Shanghai Composite down 0.8% to 2,920.90
• Sensex down 1.4% to 33,774.99
• Australia S&P/ASX 200 down 3.1% to 5,960.64
• Kospi down 0.9% to 2,176.78
• German 10Y yield fell 4.8 bps to -0.379%
• Euro up 0.09% to $1.1384
• Italian 10Y yield rose 5.0 bps to 1.422%
• Spanish 10Y yield fell 2.8 bps to 0.649%
• Brent futures down 3.1% to $40.43/bbl
• Gold spot down 0.2% to $1,734.61
• U.S. Dollar Index up 0.2% to 96.11

Top Overnight News

• A second wave of cases in America is raising alarms after new infections pushed the overall count past 2 million
• U.K. Prime Minister Boris Johnson is battling to contain a public split with his top scientific advisers after they warned the government must learn from a catalog of failures it made during the coronavirus crisis
• Governor Haruhiko Kuroda says Thursday the Bank of Japan will take all necessary measures to protect jobs, businesses and people’s livelihoods amid the pandemic
• European Central Bank Chief Economist Philip Lane says the PEPP expansion last week is aimed at helping a recovery and countering a “substantial negative shock to the inflation trajectory”

Asian equity markets ended the session lower as the region took its cue from the underwhelming performance on Wall St where the spotlight was on the FOMC which maintained rates as expected and projected no change in rates through to 2022, while members forecast a 6.5% contraction in the economy this year and Fed Chair Powell also struck a cautious tone during the press conference. This resulted to a choppy reaction in US stocks and most major indices finished negative with energy and financials resuming their underperformance, although tech continued to buck the trend to lift the Nasdaq to its first ever close above the 10k landmark. ASX 200 (-3.1%) and Nikkei 225 (-2.8%) were lower as Australia’s financials and energy sectors mirrored the hefty losses seen in their counterparts stateside, while sentiment in Japan was pressured by a firmer currency and further deterioration of large business surveys in which the BSI Large Manufacturing Index slumped to -52.3 from -17.2. Hang Seng (-2.3%) and Shanghai Comp. (-0.8%) were mixed following another drab PBoC liquidity effort and with participants mulling mixed Chinese financing data, with focus also on IPO developments after NetEase shares surged around 10% at the open on its Hong Kong debut. 10yr JGBs edged higher and broke above the 152.00 level amid gains in T-notes and weakness in stocks, while the results of the enhanced liquidity auction in the long- to super-long end were mixed but attracted a slightly higher b/c.

Top Asian News

• Booming Online Businesses Are Next Target in Philippine Tax Hunt
• SoftBank’s China Chip Venture Rejects Accusations Against CEO
• Even With $500 Billion Warchest, RBI Won’t Let Rupee Climb
• JD Is Said to Raise $3.9 Billion in Year’s Second-Largest Listing

European equities continue to bleed as the session is underway [Euro Stoxx 50 -2.2%], following a similarly downbeat APAC handover as sentiment takes a hit post-Fed with investors weighing the prospect of resurging COVID-19 cases in the US – with Texas seeing the highest one-day total since the pandemic began, Florida cases rising above key recent averages and California hospitalisations at the highest since early May. Add to that the background tensions brewing between US and China, geopolitical tensions in the Korean peninsula, Brexit risk and disagreement over EU member states over the Recovery Fund proposals. Major European bourses trade with losses deeper than 2% at the time of writing, with Netherland’s AEX (-1.5%) faring somewhat better as Unilever (+2.3%) cushioned the index as the group is to combine its Anglo-Dutch arms to streamline M&As. UK’s FTSE 100 (-2.3%) fails to glean much support from the stock as exporters bear the brunt of a firmer Sterling. Sectors all reside in the red with defensives outpacing cyclicals – Energy, Financials and Consumer Discretionary lag. The detailed breakdown paints a similar anti-cyclical picture with Travel & Leisure taking a hit on the prospect of a second wave. In terms of individual movers, Lufthansa (-6.5%) pared back a bulk of opening losses after plunging 12% at the open after stating they have a surplus of 26k employees and said job cuts would be “significantly more” than the 10k figure previously estimate. Meanwhile, PSA (-6.3%) and Fiat Chrysler (-5.6%) are subdued amid reports the merger is facing a full-scale antitrust probe as they have failed to provide the necessary concessions to EU Officials regarding the van units which they have reportedly been reluctant to sell, according to sources.

Top European News

• Generali Is Said to Explore Options for Swiss Insurance Unit
• Europeans Are Hoarding Billions and Have Few Plans to Spend Them
• Unilever to Combine British, Dutch Arms in U.K. in Reversal
• Biting Passenger Gets EU Airlines Off Hook for Flight Delays

In FX, the DXY has been choppy in wake of the FOMC, but ultimately still more inclined to extend its losing streak within a 96.503-95.946 range as the Greenback underperforms G10 counterparts with a greater weighting in the basket. For the record, no new policy changes emerged from the Fed, but maintaining accommodation via QE was reaffirmed and the new dot plots signalled no change in rates until the end of 2022, albeit not indicating any chance of NIRP either. However, beyond a nod to last Friday’s gravity-defying headline payrolls count the FOMC’s prognosis of the economic situation and tone of Chair Powell’s presser was largely downbeat. Hence, no real respite for the Buck aside from recovery gains vs high beta and more risk sensitive rivals, especially as doubts about reopening from COVID-19 have been subsequently compounded by reports of 2nd waves of the pandemic in several US states that have lifted restrictions.

• CHF/JPY/EUR – All extending advances against the Dollar, with the Franc now on the cusp of 0.9400 and testing 1.0700 vs the Euro even though Eur/Usd is rebounding towards Wednesday’s 1.1400+ spike highs. Meanwhile, the Yen continues to grind higher and has now soaked up offers ahead of 107.00 to expose another prior peak at 106.74 that was last seen on May 13 and constituted a higher low for the headline pair.
• GBP/SEK/CAD/NZD/AUD/NOK – The Pound remains top heavy around 1.2750 in Cable terms and above 0.8900 on the Eur/Gbp cross due to rising Brexit no deal probability and coronavirus contagion, but the Swedish Krona has gleaned some protection from broad risk aversion following firmer than forecast inflation data rather than Riksbank remarks, as Jansson contends that the near term contraction in GDP may be a bit worse than envisaged in April’s projections. Indeed, Eur/Sek is holding below 10.5000 whereas Eur/Nok has rebounded much further from recent lows to 10.7000+ at one stage amidst a deeper retreat in crude prices that is also weighing on the Loonie, with Usd/Cad firmly above 1.3400 again between 1.3398-1.3498 parameters. Similar story down under where the Kiwi and Aussie have recoiled from best levels to trade sub-0.6500 and close to 0.6900 vs their US peer, albeit with Aud/Usd holding just above stops said to be sitting in wait at 0.6898, while Nzd/Usd is now eyeing US weekly claims and PPI before Westpac’s Q2 NZ consumer survey, May manufacturing PMI and FPI for further direction.
• EM – Risk-off positioning undermining most regional currencies, but the Yuan and Lira weathering outflows better than others after another dip in the PBoC Usd/Cny fix and Usd/Try is capped by chart resistance circa 6.7900-50.

In commodities, WTI and Brent front month future conform to the overall risk aversion post-Powell with added weight from a resurgence in cases State-side and ongoing questions regarding the enforcement of OPEC compliance among laggard producers. Fresh news-flow has been light for the complex this morning with price action more-so a continuation of downside from the US and APAC sessions. WTI Jul briefly breached USD 38/bbl to the downside (vs. high 39.09) multiple times but USD 37.90/bbl held as a support throughout the session thus far. Meanwhile, Brent Aug trickles lower in tandem as it hovers around USD 40.50/bbl having found a mild base at USD 40.10/bbl and having waned off highs a touch above USD 41.00/bbl. Spot gold sees muted price action relative to the melt-down in stocks and bounce in bonds – with the yellow metal stable north of USD 1725/oz (USD 1727-40/oz intraday range) as it juggles USD action with the risk aversion in the market. Copper meanwhile retraces some of recent supply-led gains, with the risk-off tone also possibly providing the red metal with downside impetus as prices retreat from the USD 2.7/lb mark and closer to USD 2.65/lb.

US Event Calendar

• 8:30am: PPI Final Demand YoY, est. -1.2%, prior -1.2%; MoM, est. 0.1%, prior -1.3%
• 8:30am: PPI Ex Food and Energy YoY, est. 0.4%, prior 0.6%; MoM, est. -0.1%, prior -0.3%;
• 8:30am: Initial Jobless Claims, est. 1.55m, prior 1.88m; Continuing Claims, est. 20m, prior 21.5m
• 9:45am: Bloomberg Consumer Comfort, prior 37

DB’s Jim Reid concludes the overnight wrap

The Fed reiterated that it expects to maintain the near-zero fed funds rate until it is confident the economy is on track to achieve the central bank’s dual mandate. The quarterly dot plot, which was not published back in March due to the high level of uncertainty in forecasting, showed rates near-zero through 2022. It was a strong signal with only two dots above zero in 2022. Powell reinforced this message with the line that they are not even “thinking about thinking about raising rates.”

Along that timeline, the central bank does not expect GDP to return to pre-recession levels until at least 2022. On QE, the Fed said that it would continue its purchases “at least at its current pace,” which amounts to $80bn Treasuries and $40bn MBS per month. This was perhaps the most dovish development as it puts a floor on how much the Fed could buy, while leaving them able to surprise to the upside.

During the press conference Powell tried to downplay last week’s jobs report surprise and manage overall expectations of the considerable risks ahead for the US economy. He said that the Fed, “will continue to use our emergency powers forcefully, proactively and aggressively until the economy is solidly on the path to recovery”. He also stressed the need for fiscal support to stimulate the economy, considering the Fed only has the power to lend. Powell called the outlook extraordinarily uncertain, but that a full recovery is unlikely before people feel safe to resume normal activities. Is that just a step away from saying before a vaccine or herd-immunity is present? In the prepared remarks Powell touched on yield curve control, saying it remains an open question. DB think they’ll announce it in September where it’ll be focused on the 3 year part of the curve. Powell also touched on the topic of asset price inflation saying that “we’re not focused on moving asset prices in a particular direction at all, it’s just we want markets to be working and partly as a result of what we’ve done, they are working.” He also alluded to the fact that the Fed was unlikely to hold back just because of high asset prices as the damage to “normal people” would be greater. So a pretty explicit message. See our economists’ piece on the meeting here.

Going into the FOMC, the equity market looked somewhat like it did on Tuesday with the S&P 500 down slightly due to cyclicals lagging and technology stocks outperforming. The market rallied around 0.7% on the press release and through the early moments of the press conference before moving between gains and losses throughout the final 2 hours of trading as Powell spoke. The S&P 500 finally closed down -0.53%. Information Technology (+1.69%) was the only sector higher in the US, as the NASDAQ rose +0.67% to another record high. With the Fed dot plot showing rates low through 2022, US Bank stocks were the worst performing industry, down -5.75% – nearly 2.5% of that move came after the Fed announcement. In other assets, the US dollar fell to a 3-month low dropping -0.29% on the day. Gold rallied +1.06% with yields likely to remain low, and to that effect 10yr Treasuries fell -9.1bps to 0.735%.

Asian markets have also weakened this morning, with notable losses for the Nikkei (-2.05%) and ASX (-3.14%) in particular, while the Hang Seng and Kospi are down -1.04% and -1.41% respectively. Bourses in China are bucking the trend, trading close to flat. Yields on 10y Treasuries are down another -1.6bps and futures on the S&P 500 are trading down -0.88%. Elsewhere, WTI oil prices are trading down -3.11% to $38.38 after a buildup in US crude stockpiles.

Seemingly also not helping sentiment this morning is news that Texas reported 2,504 new coronavirus cases yesterday, the highest one-day total since the pandemic emerged. The latest numbers also show a pickup in cases in Florida and California. Eric Toner, a senior scholar at the Johns Hopkins Center for Health Security said that “There is a new wave coming in parts of the country. It’s small and it’s distant so far, but its coming.” A reminder that the current case and fatality Covid tables are in the pdf every day in the EMR.

As we navigate through the economic impact of the virus, yesterday we also published our latest weekly PowerPoint-based Exit Strategy Policy Tracker to help compare the current state of play towards reopening major economies. You can find the latest edition here.

The virus continued to cast a shadow on the data yesterday as May’s US CPI reading underperformed expectations. In terms of the month-on-month measure, both the CPI and core CPI readings came in at -0.1% (vs. 0.0% expected for both). That left the main CPI reading at just +0.1% year-on-year, which is its lowest annual rate since September 2015, while the core CPI print of +1.2% was its lowest since March 2011.

Meanwhile in Europe yesterday, financial markets struggled ahead of the Fed’s decision, as European equities fell for a 3rd day in a row. The STOXX 600 ended the session down -0.38%, while the DAX (-0.70%) and the CAC 40 (-0.82%) saw even larger falls. Against this backdrop, there was also a further divergence in sovereign bond spreads between the core and periphery. In fact, the spread of Spanish and Portuguese yields over 10yr bunds now stand above their levels before the ECB’s announcement of an extra €600bn in asset purchases last week, widening by a further +6.3bps and +7.0bps respectively. And the Italian spread also widened by +7.3bps in what was its 3rd consecutive move higher.

This repricing of peripheral risk came against the backdrop of a number of ECB headlines yesterday. Isabel Schnabel of the executive board said that the ECB didn’t “necessarily have to extend our toolbox already right now, but according to how the crisis develops there may be a time when this becomes necessary”. However, the Estonian central bank governor, Madis Muller, said that if growth recovered as expected in the second half and the inflation outlook didn’t worsen, “then I think an additional increase in the asset-purchase program isn’t needed”. Yesterday marked the first time in over two weeks that market expectations of Euro Area inflation fell, with five-year forward five-year inflation swaps snapping a run of 11 successive increases to fall by -1.6bps to 1.08%.

Staying with Europe, and yesterday saw a number of Brexit headlines, as the EU’s chief negotiator, Michel Barnier, said that there needed to be “clear and concrete signals” that the UK would compromise in order to reach a trade deal. It came as the Guardian reported that the European Parliament could veto such a deal if there weren’t “robust” safeguards, according to a draft resolution. That would include a level playing field, which has proven one of the biggest sticking points in the talks, but was described in the resolution as a “necessary condition for the European parliament to give its consent to a trade agreement with the UK”. Thus far the negotiations haven’t made much headway at all, so all eyes will be on a meeting expected later this month between Prime Minister Johnson and Commission President von der Leyen to see whether they will be able to break the deadlock. Remember that if a free-trade agreement can’t be reached, then we arrive at another Brexit cliff-edge at the end of the year (apologies if you’re experiencing déjà vu now…), since the end of the transition period sees the UK automatically leave the EU’s single market and customs union.

Aside from the US CPI reading there wasn’t a great deal of other data yesterday. However, we did get French industrial production for April, which fell by a further -20.1%, following a -16.2% decline in March.

To the day ahead now, and data highlights include Italian industrial production for April, weekly initial jobless claims from the US, along with May’s PPI reading for the US. This afternoon, there’ll also be a video conference of the Eurogroup taking place.