The S&P closed at a record high of 2,954.18 (+0.95%), it’s first all-time high since the end of April, in a wide market rally following the Fed’s signal that a rate cut may be in the offing. The DOW and NASDAQ also rallied, with the DOW rising 0.94% to close 75 points off its October 2018 record and the NASDAQ closed over 8,000 for the first time since May 6 after gaining 0.80%. Yield on 10Y USTs was slightly higher at 2.0284%.
Boris Johnson will fight it out for the leadership of the Conservative Party with former Remainer Jeremy Hunt after Sajid Javid and Michael Gove were knocked out in the first and second bouts of voting respectively on Thursday. Hunt just managed to scrap through, beating Michael Gove by just two votes with 77 in the last round of voting miles behind Boris Johnson who had 160. Suspicions of vote lending were rife as Johnson’s backers were supposedly more keen to meet Hunt in the final round than Gove. The two will now take part in more than 10 hustings events in a bid to win over support from the 160,000 voting Tory members. The pound firmed against the dollar to 1.2702 while yield on 10Y UKTs lost 6bps to 0.8055%.
Italy’s economy is likely to shrink again this quarter according to the country’s statistics office, Istat. The contraction fears were announced on a day Prime Minister Giuseppe Conte was travelling to Brussels for an EU summit where Rome has been under the spotlight for failing to rein in debt. In the latest communication with the EU, Conte had written that Italy would not violate EU rules and also called on the bloc to look at how it can strike a balance between growth and stability. Asked to comment on the Istat release, Deputy Prime Minister said that the impending contraction supports his calls for tax cuts and public spending in order to kickstart growth. The euro was higher at $1.1293 while yield on 10Y DBRs shed 3bps to -0.3197%.
Asian stocks largely retreated in afternoon trading in stark contrast to their Wall Street peers which had a broad rally. The HANG SENG was down 0.47% as protesters again gathered at government offices while the NIKKEI was shed 0.95% as the HIS market flash PMI showed indicators dropping. The CSI bucked the trend, cementing early gains to trade 0.50% up having opened 0.2% in the green. The Bank of Japan followed the general dovish stance globally by signaling readiness to ramp up stimulus even as it left monetary policy unchanged and maintained the stance to keep rates low until H1 2020 at least.
Turkey ran a budget deficit in May, a sign that authorities maintained stimulus to support the economy before a rerun of the Istanbul elections. The deficit was 12.1 billion liras compared with a surplus of 2.7 billion for the same month last year. With tax cuts having been extended on consumer goods through June, Goldman Sachs economists are forecasting a budget deficit of 4.2% of GDP for the year compared to 1.8% assumed by the government. The lira firmed to 5.7638 to the dollar while TURKEY 47s rallied to 82.200.
The downgrading of PEMEX to junk status by Fitch last week could have more far-reaching effects beyond just the oil company. Moody’s and S&P both have a negative outlook on the company hose debt has rocketed to $106.5 billion as it tries to clamp down on 15 years of production declines. The company was responsible for a fifth of the government’s budget revenue last year and the spillover effects are particularly pronounced for the peso were government debt to be downgraded; an estimated 5% rout would ensue on the currency. In addition, because of substantial ties between oil production and fiscal balance (and in turn economic growth), this would have broader implications for other risk assets including stocks. Some analysts are attributing the lagging performance on Mexican stocks this year to lingering concern over PEMEX. The peso was about flat at 19.0037 while MEXICO 47s firmed to 100.004.
Russia made a return to the eurobond space immediately following the dovish Federal Reserve meeting by offering a $2.5 billion tap on its bonds maturing in 2029 and 2035. Demand for the bonds was high with organisers of the tap, VTB Capital and Gazprombank, saying they received about $7 billion in bids. Largely stable oil prices, recovery in emerging markets and improving fundamentals on the Russian economy have prompted a rush into Russian debt this year even as investors remain wary of US sanctions. The ruble was among top performers in emerging market currencies strengthening over 1% to 62.90 to the dollar. RUSSIA 47s also rallied to close at 112.162.
The South African Treasury is hopeful parliament will speedily approve a bill to release funds to the embattled state power utility giant Eskom before August. This came on the back of President Ramaphosa’s announcement that the government will support Eskom and not allow it to fail. The financing need of Eskom is SAR230bn over a 10-year period and Ramaphosa is hopeful the bill will be approved in August and funds dispersed quickly. On the back of the President’s speech the rand gained slightly on the back of the President’s speech and is currently trading at 14.3888 against the dollar. The yield on SOAF 25s slid to 5.55% at close yesterday.