US stocks closed largely on a high after Fed Chair Jerome Powell’s congressional testimony on Thursday left investors feeling fairly confident about the odds of a rate cut this month. The DOW and S&P closed at record highs with the DOW surging 0.85% to close above the 27,000 mark while the S&P gained 0.23% to close just 0.09 points shy of 3,000. The NASDAQ closed lower at 0.08% taking the brunt of a weaker-than-expected treasury bond sale. As a result, yield on 10Y USTs surged 7bps to close at 2.1378%.
The Bank of England on Thursday warned that the highly contentious no-deal Brexit posed “material risks of economic disruption” and “significant” market volatility as its perceived likelihood has increased since Theresa may announced she would resign. In its six-monthly laundry list of concerns, the BoE noted that a disorderly Brexit and global trade wars are the two most imminent threats to the UK economy. The central bank also attributed the significant drop in foreign investment – the Q1 figure was a mere 14% of the quarterly average last year – to the uncertainty related to Brexit. The pound closed higher against the dollar at $1.2521 while yield on 10Y UKTs rose 8bps to 0.8344%.
The dovish tilt in central bank policy has made Italian bonds very attractive to traders as the country’s second offering this week was snapped up by traders. Italian yields, second only to Greece in the bloc, have drawn investors on the hunt for positive returns. The prevailing demand for Italian bonds has been so much that yield on the benchmark 10Y notes has slid 43bps this month already and yield spread over German benchmark bunds has narrowed to 192bps, the lowest in over a year. The euro closed marginally higher at $1.12254 while yield on 10Y DBRs gained 8bps to -0.2277%.
Asia stocks opened on a largely high note on Friday after a turbulent day on Wall Street on Thursday. Major bourses were trading higher in the afternoon with gains for the NIKKEI (+0.20%), the HANG SENG (+0.23%) and the CSI (+0.47%). Investors were watching out for Chinese trade data for June to be released later in the day; initial estimates are pointing towards a drop in imports and exports as has been the case for every month this year save April. Official Q2 GDP data is in Monday and expectations are that growth will slow with an AFP survey forecasting a growth of 6.2% for Q2 which would be the slowest in some 30 years.
Turkey is preparing to modify some reserve rules for commercial lenders in an effort to boost the economy through faster credit growth. Facing the prospect of a double-dip recession, the government is trying to unlock extra financing for the economy as annualized lending growth has almost stalled, adjusted for foreign currency fluctuations. The proposed bill, submitted to parliament by the ruling AKP earlier in the week, will allow the central bank more liberty in setting rules for mandatory reserves taking into consideration balance sheet items. The proposal will entail lower requirements for banks that lend more which should be a boost to state banks who have been at the fore of the government’s drive to extend cheap loans. The Borsa Istanbul Banks Sector retreated from early gains to fall as much as 1.5% in the afternoon while the main index was up 0.8%. The lira closed slightly higher to the dollar at 5.6739 while TURKEY 47s traded lower in the high 81s.
President Mauricio Macri has been backed to win this year’s election in a runoff vote against Alberto Fernandez by yet another polling firm. Management & Fit’s poll sees the incumbent losing the primaries to his closest rival as was the case in the Poliarquia and Isomonia polls. M&F polled a tight primary with Fernandez pipping Macri 39.9% to 38.2% in the primaries. Argentine firms have continued to rush to the market for debt sales as elections draw nearer with Telecom Argentina S.A issuing $400 million yesterday at a yield of 8.25%. The peso firmed closing at 41.7212 to the dollar while ARGENT 47s closed lower in the low 74s.
Russian ruble bonds have given investors a 21% return this year, second only to Egypt in emerging markets. Despite the ever-present threat of US sanctions, Russia has seemingly been given a reprieve as the US has apparently focused much of its energy on the trade war with China. Strong economic fundamentals have also pushed the attractiveness of Russia with the ruble surging 11% this year, the strongest globally after a poor showing last year with only the Turkish lira and Argentine peso performing worse in the emerging markets. The ruble closed higher to the dollar at 62.8151 while RUSSIA 47s traded unchanged in the mid-111s.