Markets
Friday’s profit taking move didn’t continue in this week’s first trading session. The main leap higher occurred at the start of European trading without strong driver. Geopolitical concerns could have played a role with the US weighing new sanctions against Iran. On the other hand, positive momentum has been building in the run-up to Friday’s Trump/Xi Jinping meeting. Whatever the reason, we wouldn’t draw strong conclusions from today’s probably even outsized gains given extremely low volumes. Stock and oil markets don’t offer an explanation neither. The main eco event, June German Ifo business sentiment, showed a stabilization near May levels as expected and confirming the outcome of last week’s PMI’s. The head of the Ifo institute said he expected things could still get worse, but maybe not much but a little. Investors are now looking forward to this week’s first highlight, which is a speech by Fed Chair Powell tomorrow morning on the economic outlook and monetary policy. Will he be more specific on the Fed’s reaction function when it comes to the July meeting? Markets currently fully discount at least a 25 bps rate cut. The German yield curve bull steepened today with yields down 0.5 bps (2-yr) to 2.9 bps (30-yr). Changes on the US yield curve vary between -1.8 bps (5-yr) and -2.9 bps (30-yr). 10-yr yield spread changes vs Germany narrow up to 3 bps with Greece (-9 bps) outperforming. Additional Italian outperformance because of short term mercy from the EU with regard to the excessive deficit procedure didn’t last long.
EUR/USD continued last week’s uptrend, albeit at a more modest pace. On Friday, the single currency was supported by a better than expected EMU PMI. European yields rebounded a few bp and EUR/USD cleared the 1.1350 resistance. Today, follow-through euro buying continued even as news flow was less euro supportive. German IFO business climate declined further from 97.9 to 97.4, as expected. Both US and German yields declined again. The US-German yield spread for shorter maturities narrowed again and was a slight negative for the dollar. Maybe, investors were also cautious to run USD long exposure in the run-up the G20 meeting later this week. A better/less negative sentiment on the global trade war might be at least as supportive for the euro than for the dollar. At the same time, US president Trump might renew its claim of US trade partners artificially weakening their currencies resulting in an unfair disadvantage for the US. Today, Trump repeated that the Fed has it wrong and that the US needs rate cuts. The EUR/USD (1.1385 area) is trading within reach of the 1.14 big figure, but no break occurred yet. USD/JPY showed no clear trading and is trading in the 107.40 area.
There was no obvious story to inspire sterling trading today. The race for the leadership of the UK conservative party between Boris Johnson and Jeremy hunt is becoming ever more thorny. The outlook on the outcome and on the consequences for Brexit hasn’t changed in profound way. Boris Johnsons remains the most likely winner and a disorderly separation between the EU and the UK remains possible, keeping sterling in the defensive. For now, UK eco news remains of secondary significance for sterling trading. EUR/GBP is holding near recent peak levels in the mid 0.89 area. Cable moved up and down in the 1.27 big figure (currently 1.2710 area).
News Headlines
The German IFO business climate fell from 97.9 in May to 97.4 in June, the lowest level since November 2014. Even so, the number was slightly better than expected. Ifo president Fuest said that business climate deteriorated both in the manufacturing and services sectors, but Ifo doesn’t expect a recession.
German Finance Minister Scholz has cut 2020 expenditures on weaker revenues, government officials said. The country will spend about 3 bln euros less compared to the March forecasts, keeping the debt level on track to fall below 60% of GDP for the first time. The Finance ministry expects a further decrease to 51% by 2023.
