Markets
Global core bonds were little inspired last Friday. The German Bund developed in a choppy sideways pattern amid an empty EMU eco calendar and as markets pondered any ECB moves following the policy meeting on Thursday. Yield differences varied from +1 bp (2-yr) to -1.4 bps (10-yr). Peripheral spreads widened with Italy and Greece (both +6 bps) underperforming. The release of US Q2 GDP brought only a bit more excitement in the Treasury market. Growth did not slow down as much as expected, mainly on the back of strong private consumption. However, details were too “messy” for markets to draw any strong conclusions. The US yield curve flattened a little with yields advancing 1 bp at the short end (chances of a 50 bps cut by the Fed decreased marginally) while the 10-yr tenor declined 1.4 bps. This week’s eco calendar is heavily back-loaded and eyes rather meagre today. We therefore expect no strong directional bond trading at the start of the week with US/Sino talks (tomorrow), the Fed policy decision, EMU GDP/CPI, Chinese PMI’s (Wednesday), US manufacturing ISM (Thursday) and July payrolls (Friday) all looming the market. If anything, core bonds might hold to recent levels amid these uncertainties.
The dollar regained the upper hand on Friday. The post-ECB euro rebound had no strong legs. US Q2 growth was slightly stronger than expected at 2.1% QoQa. The report contained few elements for the Fed to cut its policy rate by more than 25 bp this week. The dollar gained few ticks, but didn’t break important technical levels. EUIR/USD closed at 1.1128 (from 1.1147). USD/JPY gained only marginally (close at 108. 68). Late on Friday, there were several headlines on the US FX policy. White house advisor Kudlow said the US ruled out currency interventions, but said that president wanted a stable dollar and that he is concerned on other countries weakening their currency. This morning, the dollar hovers near recent highs, but still didn’t break any key technical levels. Asian equities are mostly in the red despite WS major indices closing at record levels. There are few data in EMU and in the US today but the calendar is well filled later this week (cf supra), with the Fed policy decision in focus. A 25 bp preemptive rate cut is expected, but markets will try to find out how much Fed easing might be needed over the next quarters. The Fed will probably leave all options open, but might be reluctant the make concrete engagements as long as the US economy performs rather well. We don’t expect radical changes in markets’ anticipation on the additional easing further out. At the same time, any doubts on the pace of further easing might keep the dollar well supported. The test of the 1.1110/00 support area might continue going into the Fed meeting and a break is still possible.
Sterling further reversed a correction from earlier last week on Friday. The EU reiterated that it won’t renegotiate the Brexit deal, raising the risk for a hard no deal Brexit. During the weekend, the new UK Cabinet reiterated that the UK will leave the EU on October 31 and that it is stepping up the efforts to be ready for a no-deal Brexit. This hard Brexit-rhetoric is putting sterling again under pressure. EUR/GBP is again nearing the 0.90 barrier. Today, the UK monetary data probably won’t be key for sterling trading. Brexit headlines will dominate. Later this week, markets will keep a close yet at the BoE policy meeting and inflation report. Will the BoE change its path of modest expected rate hikes and give more weight to the impact of Brexit related uncertainty on the economy? Short-term, there is no trigger for a sustained sterling rebound. The UK currency remains in the defensive.
News Headlines
US/Sino trade talks are to resume this week but pessimism reigns for the moment. US president Trump suggested on Friday that China may not sign a deal until the 2020 election, hoping that would deliver a different president whom it could negotiate more favorable terms with.
Rating agency Fitch maintained South Africa’s sovereign rating at BB+ but cut its outlook from stable to negative, citing a worrisome fiscal balance – related to the government’s support of Eskom – and subdued economic growth due to the slow pace and limited scale of supportive measures.
