June 10, 2020 / 8:06 AM / a month ago

MORNING BID-Fed up

(A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own.)

LONDON, June 10 (Reuters) - Stock markets seem keen to return to the black after Tuesday's stumble. Europe has opened 0.7% higher and U.S. futures are up around half a percent. But focus today is squarely on the U.S. Federal Reserve; while it is expected to maintain its interest rate and leave its asset purchase policy unchanged, the question is: will it act to cap longer-dated borrowing costs?

Most reckon it will wait until September. But yield curve control will come up for sure – and chances of it acting or signalling a move today have brought yields lower – the 10 year segment is around 0.82%, off recent highs over 0.9%. The same jitters have pushed the dollar index to a new 3-month low.

Elsewhere, Chinese producer prices offered more proof of the global trade and consumer demand malaise. Factory gate prices fell by the sharpest rate in more than four years to -3.7% year-on-year. And remember recent data confirmed exports contracting and Chinese consumers not in any rush to go and spend.

Signs of consumers' hunker-down mood are everywhere – Reuters reported Goldman Sachs will shut its Marcus savings account for UK customers as deposits have surged to near regulatory limits since COVID-19 erupted.

That's all bad news for consumer sectors and actually most others – crude futures are down, with rising U.S. inventories reviving oversupply concerns. And that's after the OPEC-Plus producers group extended its record supply cuts.

Euro zone sovereign debt markets are still feeling the glow from EU recovery fund proposals, despite opposition from the 'frugal four' - Netherlands, Austria, Denmark and Sweden -- before next week’s EU summit. They argue European countries can borrow cheaply on the market so the EU fund should loan rather than grant money to member states.

Perhaps that's why a host of so-called peripheral euro zone countries have been hitting the bond markets (and proving they can indeed borrow cheaply). Ireland attracted record orders of nearly 70 billion euros for its 6 billion-euro sale, while Spain and Greece also enjoyed bumper demand.

But the borrowings also highlight how debt ratios are set to rise – S&P Global gave us a reminder today by cutting Japan's rating outlook, noting the uncertain fiscal health outlook.

On stock markets, European banks are trying to claw back yesterday's 3.7% fall, having rallied around 2%. In fact, banks are very much in focus after Reuters reported the European Central Bank is planning a scheme to deal with unpaid loans to shield lenders from coronavirus crisis fallouts.

Focus also on Commerzbank where shares are up 4% after investor Cerberus called for changes to the board and strategy. British bank HSBC was accused by U.S. Secretary of State Mike Pompeo of "corporate kowtows" for backing China's moves to end Hong Kong's autonomy..

In other pandemic fallout news: German automotive supplier Continental may have to lay off workers due to slumping demand. Lufthansa shares fall 3.8% as Germany may extend some travel warnings to August 3; Zara owner Inditex booked its first-ever quarterly loss.; British fashion retailer Quiz will place its stores unit into administration and then buy it back to renegotiate rental terms.

Emerging stocks are up 0.4% for their ninth day of gains -- the longest such run in over a year. Dollar weakness is lifting many EM currencies with Mexico's peso and Russian rouble up around half a percent.

Editing by William Maclean

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