Risk Assets Start the Day Lower as Virus Infections Continue to Spread in Southern States

Rates and risk assets fall sharply to start the day as markets continue to trade on COVID-19 headlines. Treasury yields and swap rates are 2-5 basis points lower across the curve as COVID-19 infections continue to accelerate in hotpots like Texas and Florida. The CDC believes that the rising numbers may not even accurately reflect current conditions with researchers estimating only one in every ten COVID-19 cases is currently being recorded. CDC Director Robert Redfield added, “This outbreak is not over. The pandemic is not over. Greater than 90% of the American public hasn’t experienced this virus yet.” The current US tally sits at 2.46 million confirmed cases with deaths topping 126,000.

Financial crisis-era Volcker Rule has been eased by regulators. The Volcker Rule, instated after the financial crisis, set to prevent banks from engaging in proprietary trading and from retaining ownership in hedge funds or private equity funds. As of Thursday, the FDIC, Federal Reserve Board of Governors, Office of the Comptroller, SEC, and CFTC changed the terms of the rule “to modify and clarify the covered fund provisions.” The update rolls back some of the earlier restrictions, now allowing banks to invest in venture capital firms under certain circumstances. The increased flexibility comes with an added threshold, as firms will still be required to set aside initial margin if they were operating under the old rule before the change. Despite that added requirement, the overall change is estimated to free up billions of dollars in capital for banks.

GBP/USD appears to have stabilized this week.  With continued news of a “second wave” of coronavirus infections in the US, and Brexit negotiation tensions in the UK, GBP/USD traded in the 1.24 range throughout the week.  It continues to be unlikely a Brexit deal will occur prior to the June 30th deadline, which will continue putting pressure on the pound sterling even as the US itself grapples with the COVID crisis in high population states of Florida, Texas, and California.

The Euro weakened during Thursday’s trading session. Similar sentiment exists in the EUR/USD trade, as a the Euro weakened on Thursday, reaching a low of 1.1208, as ECB President Lagarde warned of challenges to the Eurozone’s recovery, and a US dispute with the EU regarding potential change in tariff policy on EU goods lingered. This was in spite of positive consumer confidence in Germany which, weighed against the downward pressures, kept EUR/USD stable.

Personal income fell 4.2% and consumer spending rose 8.2% in May. Personal income rose by over 10% in the month of April as the government distributed stimulus checks. Despite the rise in income, consumer spending plummeted by 13.6% due to business closures and lockdown measures. Both figures were in line with economist expectations. The US Department of Commerce commented that “federal economic recovery payments continued but were at a lower level than in April, and government ‘stay-at-home’ orders were partially lifted in May.”