Markets
With US financial markets closed for Independence Day, all trading was concentrated in Europe today. Special focus went to the German Bund, which hovered near the ECB’s -0.40% deposit rate recently. The Bund started off near its latest high and soon resumed an upward trend again amid a cautious risk sentiment. A German construction PMI (June) at the verge of pointing to economic contraction (50.0) and weak EMU retail sales in May, both under ‘normal’ trading circumstances considered irrelevant/outdated, gave the Bund additional support along its march north. It was probably also the final nudge in the back needed for the German 10y yield to slip below the symbolic -0.40% level before recovering marginally. However, ECB’s Rehn hinting at flexibility with respect to the self-imposed limits on quantitative easing a bit later eventually send the German 10y to about -0.41% (-2.3 bps) at the time of writing. Other German yields lose about 1.5 bp (5-yr) to 2 bps (30-yr). The recent steep decline in rates caused France to sell 10-yr and 15-yr bonds at record low yields as did Spain with a 6-yr, 10-yr and 30-yr auction. Peripheral spreads take a breather after narrowing aggressively this week. Portugal adds 6 bps to the spread. Italy (+10 bps) underperforms but still has a -0.36 bps narrowing on the counter this week.
Trading in EUR/USD and USD/JPY developed in extremely tight ranges as activity lacked guidance from the US. EMU May retail sales printed again very weak. The figure is a bit outdated. Still the release reinforced the decline in core European yields but there was little fall-out on the euro. In the wake of yesterday’s tweet of president Trump accusing Europe and China of currency, there were several articles on financial newswires, debating a potential chance in the US FX policy. Some analysts even don’t exclude a scenario of the US using FX interventions to adjust the value of their currency. Any change in the USD policy will be very important for global FX trading. However, it remains uncertain whether such a move will take place and how profound it might be. Whatever the outcome of the debate, it wasn’t the right time for FX investors to trade this theme when US markets are closed. Both EUR/USD (1.1275 area) and USD/JPY (107.80 area) are little changed. Tomorrow’s US payrolls is the next event with potential to move the dollar (and other parts of global markets).
The absence of US traders also paralyzed sterling trading today. The campaign of the two contenders to become UK conservative party leaders (and the UK PM) continues. Of late, both candidates kept the door open for a no deal Brexit. That weighed on sterling. However, there were no new elements in the debate today. UK eco data were also second tier. As was the case for the dollar, sterling trading was also order-driven and confined to tight ranges. EUR/GBP held in the 0.8970 area. The 0.90 barrier remains within striking distance. Cable hovers in the high 1.25 area.
News Headlines
Euro zone retail sales disappointed in May, printing at -0.3% MoM (vs. 0.3% expected) and 1.3% YoY (vs. 1.6% expected). Previous month figures were revised upwardly though. A sharp increase in online shopping failed to compensate a decline in car fuel purchases.
Former UK chancellor of the exchequer George Osborn is seeking to fill the IMF chair vacancy after current head Lagarde is expected to move to the ECB in October. Current governor of the Bank of England, Mark Carney, is also tipped to be considering the role. The BoE declined to comment.
