Markets
Another batch of dreadful July EMU PMI’s, especially in the manufacturing sector, triggered a general flight to global (but not only) core bonds today. The German Bund outperformed US Treasuries with money markets increasing bets on additional ECB easing in the near future, which is expected to be announced (at the very least) tomorrow. Germany’s yield curve bull flattens with changes varying from -1 bp (2-yr) to -4 bps (30-yr). The 10-yr yield is currently trading at -0.385% (-3 bps) and closes in on its all-time low of -0.409% in early July. The European periphery also profits from much anticipated ECB easing with spreads declining. Greece’s 10y yield hit a new record low, spreads narrow 3 bps. Italy (-7 bps) outperforms, drawing additional support from Lega’s Salvini saying the government “will go ahead” and the country’s Treasury canceling an August auction, citing large cash availability. The Italian 10y yield slips to the lowest level since October 2016. US yields decline around 2.7 bps across the curve.
EUR/USD fell below the 1.1180 support yesterday as investors prepared for a soft ECB at tomorrow’s policy meeting. This morning, the EMU PMI’s printed again much weaker than expected, with especially the poor performance of the (German) manufacturing sector signaling a difficult road ahead for the European economy in the second half of the year. Core European yields and the euro nosedived. EUR/USD filled bids below 1.1130, but the key 1.1100/10 range bottom was left intact. USD yields also declined in lockstep with the decline of German yields. A negative equity sentiment due to some negative earnings surprises (both in Europe and the US) also reduced interest rate support for the dollar. EUR/USD is changing hands in the 1.1145 area. So, poor EMU data are leaving their traces on the euro, but the damage could have been worse. USD/JPY eases slightly and is trading near the 108 big figure. In an interview, US Treasury secretary Mnuchin indicated that he is not going to advocate a weak USD policy in the near term and that he still believes in ‘a strong dollar that signifies a strong US economy’. This official confirmation of the US ‘strong dollar policy’ had only limited impact on trading.
The sterling rebound that started yesterday, continued today. The move was mainly technical in nature. Sterling shorts apparently took some further profit and adapted positioning as the event of the nomination of the new UK PM was out of the way. Markets are now awaiting who will occupy the key positions in the new government. At least for now, the UK PM didn’t give any concrete hints on how he intends to solve Brexit. Overnight comments from BoE’s Haldane maybe also supported sterling as he indicated to be very cautious on easing policy in the current environment. Cable rebounded from the 1.2425 area to revisit the 1.25 area. EUR/GBP dropped lower in the 0.89 big figure (currently 0.8930 area). At least of now, FX markets don’t position for a high profile escalation of Brexit related uncertainty anytime soon.
News Headlines
Euro zone July PMI’s disappointed with manufacturing confidence slipping to 46.4 (a 7-yr low) and even to a very poor 43.1 in Germany. New businesses, output and employment all declined. The services sector showed more resilience and stabilized at 53.3 (55.4 in Germany). At current levels, IHS Markit sees growth slowing from 0.2 QoQ in Q2 to 0.1% in Q3.
China has given five companies approval to buy up to 3 million tons of US soybeans without retaliatory import tariffs. The exemption is considered a gesture of goodwill towards the US which could be granted again depending on how trade talks progress. A US delegation meets Chinese counterparts on Tuesday.
