The PBOC has reduced this morning the prime rate on five-year loans from 4.6% to 4.45%

J.J.Fdez-Figares (Link Securities) | Dragged down by the sharp decline that Wall Street experienced the previous day, yesterday the main European stock indices closed with significant losses, although far from their lowest levels of the day. In a moderately active session, investors went short for the second day in a row, prompting the loss of a significant part of the profits accumulated in the recent rally what European stock markets have experienced and that, as we have been pointing out, it has had an important technical component, as both the indices and many stocks started from very high oversold levels. As is often said, yesterday there was nowhere to take refuge in the European stock marketsas all sectors ended the day with losses, with the materials sector holding up somewhat better.

For their part, bonds recovered ground yesterday, which allowed for a certain relaxation in their yields, and this despite the fact that more and more members of the Governing Council of the ECB, As was confirmed after the publication of the minutes of the April meeting of this body, those who advocate a immediate rise in reference interest rates once the bond purchase programs are terminated in July. Moreover, some of its members, as was the case yesterday with the Governor of the Central Bank of the Netherlands, Klaas Knot, are beginning to defend the possibility of hikes of up to half a percentage point with the aim of “bridling” inflation.

On Wall Street, meanwhile, yesterday’s session was a real roller coaster. The main indices began the day clearly down, gradually recovering ground, becoming positive before the start of the last hour of the session, and then losing ground again and closing all of them in negative. In this market, however, there were some sectors that were able to end the day on the rise, highlighting among them materials, health and discretionary consumption, which had been severely punished the day before. It should be noted that the fact that companies in the distribution sector such as Walmart and Target have suffered a significant contraction in their operating margins as a result of the sharp increase in their costs and the impossibility of passing on said increase to its end customers via prices should not come as a surprise. However, there are companies/sectors that, for the time being, and as has been verified during the results presentation season, have continued to be able to do so, which has even allowed them to expand their margins. The big question is to determine how much longer they will be able to continue doing so.

Today, in principle, We expect the European stock markets to open higher, thus trying to recover some of what has been lost in recent days. We understand that the decision by the People’s Bank of China (PBOC) to unexpectedly lower its benchmark interest rate for loans with terms of five years or more, a move that could help reduce financing costs for struggling businesses -the PBOC this morning reduced the prime rate on five-year loans from 4.6% to 4.45%- will be well received by investors in Europe, as it has been in the Asian stock markets this morning, as it confirms the determination of the Chinese authorities to support its economy, at a time when it is coming to a standstill as a result of the confinements. But not all the news coming out of China this morning is positive. Thus, today it is known that “community” infections of Covid-19 have been detected again in Shanghai outside the confined areaswhich could upset city authorities’ plans to lift restrictions in early June.

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For the rest, it should be noted that today the macro agenda is quite light, highlighting in it only the publication in Germany of the producer price index (PPI) for April, that it is expected to continue to pick up strongly, both monthly and year-on-year; of the april uk retail sales, which are expected to be “loose”; and the preliminary reading for May of the consumer confidence index in the Euro Zone, which is expected to continue at historically low levels -see attached table with graph and estimates-, which is not good news for the growth of the region’s economy in the coming months.