Markets
Core bonds had rather dull start of the week with volumes below average. There were no important data scheduled for release while looming key events kept investors sidelined. The German Bund and US T-Note future traded with an upward bias amid a fragile risk environment. The first outperformed the latter in anticipation of a soft expected ECB (Thursday). The US yield curve shifted south with yield declines of about 1 bp across the curve. German yield changes varied from -0.5 bps (2-yr) to -2.2 bps (10-yr). Peripheral spreads widened with Italy underperforming (+7 bps) as fears rise Lega’s Salvini could call snap elections. Today’s eco calendar (EMU EC consumer confidence) again isn’t likely to inspire trading much. The US Treasury starts it’s end-of-month refinancing with a $40 bn 2-yr auction which might weigh on UST’s. Bunds are expected to remain well bid as today’s announcement of Theresa May’s successor might bring Brexit uncertainty to the fore. Also, tomorrow’s EMU PMI’s are the last input to the ECB and might keep investors guarded, favouring core (German) bonds over riskier assets.
The dollar quite easily maintained Friday’s gain yesterday. Markets concluded that a 25 bp Fed rate cut next week is the most likely scenario. Speculation on a 50 bp rate cut is probably a bit overdone given recent constructive US eco data. At the same time, investors are avoiding euro long exposure going into this week’s ECB meeting. The ECB is expected to lay the groundwork for a 10 bp rate cut in September and probably for additional easing via QE. However, euro longs don’t want to be wrong-footed as some pre-emptive ECB action on Thursday can’t be excluded. EUR/USD finished the day at 1.1209. USD/JPY closed at 107.87. A better risk sentiment and a rebound in core yields support the dollar late yesterday and this trend continues this morning. EUR/USD dropped below the 1.12 handle. USD/JPY regained the 108 level. Later today, market positioning ahead of Thursday’s ECB meeting will continue to dominate trading. The eco calendar is again moderately interesting with EC Consumer confidence. In the US the Richmond Fed manufacturing index and existing home sales will be published. The data will only have intraday significance for USD trading, at best. EUR/USD is nearing the 1.1180/90 support area. Ongoing euro caution in the run-up to the ECB decision might keep the euro in the defensive. A break below this area opens the way for a retest of the 1.11 area. Rising political tensions on Brexit might also weigh on the euro against the dollar. USD/JPY might continue to feel support from a constructive risk sentiment.
Sterling lost ground intraday yesterday as markets prepared for the outcome of vote within the UK conservative party to decide on the new UK Prime Minister. At the same time NIESR painted a bleak picture on the UK economy, even if a hard no deal Brexit can be avoided. EUR/GBP retested the 0.90 area, but closed the day at 0.8985. Today, Boris Johnson is expected to be the winner of the contest to succeed Theresa May as next UK PM. Markets look out for his first comments. However, several moderate Ministers of May’s cabinet already indicated to leave their job if Johnson would become the new PM. For now, investors probably will stay cautious on sterling as the nomination of the new PM is not expected to unlock to Brexit stalemate anytime soon.
News Headlines
President Trump announced to have reached a bipartisan debt-limit deal which congressional leaders pledged to support. The agreement would suspend the debt ceiling and increase spending levels for 2 years and now has to be approved by Congress before a six-week recess kicks in.
The New Zealand central bank (RBNZ) has begun updating its unconventional monetary policy strategy. Its economy survived the crisis without resorting to such policies but with rates at historical lows today, the RBNZ acknowledged it should have contingency plans if a new crisis were to hit to economy. The kiwi dollar fell to NZD/USD 0.673.
