Markets
Global core bonds marginally lose ground today with German Bunds outperforming US Treasuries. The bond market initially faced bigger losses in the wake of the renewed US/Sino trade truce while equities were (and still are) well bid. This classic risk on correlation did not hold throughout the session however as markets realized the trade thaw won’t alter the Fed’s assessment anytime soon (read: rate cuts are still considered all but a done deal). A series of disappointing (final) European PMI’s (Spain, Italy, Germany, EMU wide …) also took their toll on (German) bond yields. Core yields slipped even further at the start of US dealings, eventually erasing all US yield gains (+ 3 bps) during the Asian session. The US yield curve is virtually unchanged vs. last Friday. German yields decline with the belly of the curve outperforming (5-yr: -1.5 bps, 10-yr: -2 bps). Peripheral spreads narrow significantly with Greece (-10 bps) and Italy (-9 bps) outperforming. Italy’s 10y yield touches 2% for the first time since May 2018 despite having the manufacturing PMI sink deeper into contraction territory (48.7).
EUR/USD dropped from the mid 1.13 area to fill bids just below 1.1320 early this morning. The move was at least partially due to USD strength. US yields rose after the truce in the US-China trade conflict, gave the dollar some, albeit modest, additional interest rate support. EMU eco data were mixed. The June EMU manufacturing PMI was slightly downwardly revised (47.6), but the EMU unemployment rate dropped to 7.5%. The political stalemate in the negotiations to fill several European top jobs, including the job of head of EU commission, maybe was a slight euro negative too, but we assume it was only of second tier significance. In the run-up to the US trading session, EUR/USD was even captured by an intraday short-squeeze reversing the loss from this morning. US yields also reversed the intraday uptick. US investors are apparently not convinced the trade truce will profoundly change the prospect of Fed rate cuts further out this year. EUR/USD is trading in the 1.1350 area. USD/JPY hovers around 108.30, awaiting the release of the US manufacturing ISM.
At the end of last week and this morning, it looked that a test of the EUR/GBP 0.90 barrier was one step too high to be cleared short-term. Sterling apparently entered calmer waters. EUR/GBP filled bids in the 0.8925 area early this morning. However, soon it appeared that there was enough reason for investors to stay cautious on sterling. Candidate UK PM Hunt was said to embrace the idea of tax cuts and other fiscal stimulus to support the economy in case of a no deal Brexit. So, it looks that both contenders in the race to become UK PM still see a decent chance of the scenario finally becoming true. At the same time, UK June manufacturing PMI dropped further into contraction territory. UK May money supply and credit data were also unconvincing. The case for a BoE rate hike looks ever smaller. EUR/GBP reversed its earlier decline and is again trading in the 0.8960 area. Cable hovers in the 1.2660 area, off the intraday low, as the dollar is losing some momentum intraday.
News Headlines
After meeting with his Turkish counterpart Erdogan, president Trump hinted he might reconsider his threats to sanction the country over its military purchases from Russia. The Turkish lira advanced + 3% to EUR/TRY 6.4 amid a general risk on environment.
The US manufacturing ISM declined less than expected from 52.1 to 51.7 in June. The employment component edged higher to 54.5 but the new (export) orders subseries showed orders basically flatlining. Production (54.1) ticked up from last month poor reading (51.3).
