Markets
Global core bonds started the day still on a weak footing with recent ECB comments echoing through markets. They suggested a debate on ending APP at next week’s meeting and caused a hawkish repositioning. The sell-off lost pace however and the start of US dealings marked an intraday turnaround. Core bonds gained traction with US Treasuries outperforming German Bunds. We think that the move is linked to building stress in some emerging markets. Brazil and Turkey appear on investors radar as potential next domino’s to fall after Argentina. Both central banks stepped up efforts to stop the rod, the one being more successful (Turkey) than the other (Brazil). The Brazilian real lost another 3% despite increased interventions. The sell-off in BRL pulled safe haven flows into US Treasuries and the Japanese yen (USD/JPY from >110 to 119.60). US stock markets remained remarkably resilient (-0.1%) with Nasdaq underperforming. The US yield curve bull flattened with yields 2.8 bps (2-yr) to 5.4 bps (10-yr) lower. The German yield curve steepened with yield changes ranging between -1 bps (2-yr) and +2.3 bps (30-yr). The Bund gained additional ground though after the official close, which will be reflected in today’s opening.
The euro initially remained in the driver’s seat as well. The short squeeze in EUR/USD propelled the pair towards first resistance at 1.1830. A break didn’t occur after an intense test with the pair returning towards 1.18 into the close even if interest rate differentials played in the disadvantage of the greenback. The dollar might have profited from unwinding of carry trades. EUR/GBP approached first resistance at 0.8843 yesterday. A real test didn’t occur with EUR/GBP eventually closing back below 0.88. Sterling lost ground after the UK released its backstop plan for the Irish border. The blueprint remains vague and doesn’t provide a big short term breakthrough. The backstop will remain in place until the end of 2021. By then, a final arrangement should be made. Putting an exact timing in the blueprint is a concession by UK PM May to hard brexiteers.
The eco calendar remains thin today. Asian stock markets (up to -1.5%) and currencies like IDR, INR, THB,… are under downward pressure adding evidence that tensions on EM start affecting global trading. Investors might therefore hold a cautious approach ahead of the weekend and despite next week’s central bank meeting. Core bonds could benefit, ending the sell-off since the end of May. Peripheral bond markets are expected to remain under pressure. On FX markets, the dollar might profit against most majors bar JPY because of the unwinding of carry trades. EUR/USD could in this case move again lower in the 1.1510-1.1830 trading range we’ve put forward after the ECB gossip. Sterling could underperform given the latest brexit delay.
News Headlines
Brazil’s Central bank chief Goldfajn held a surprise press conference yesterday after another failed attempt with currency swaps to strengthen its Réal. He stated that the central bank will continue to intervene as long as necessary to fend off attacks, with a $380bn of FX reserves. USD/BRL trades at 3.9, from 3.7 at the start of June.
Argentina and the IMF have agreed on a $50bn financing deal. Last month, Argentine President Mauricio Macri cried for help after the peso lost a fifth of its value in a fortnight. The markets welcomed the bigger than expected ($30bn) deal, with economists saying the country has now ample capacity to pay its debt.
While US tariffs are worrying, China published strong trade data this morning. Exports rose 12.6% YoY last month (11.1% expected) and imports grew 26% YoY (18% expected). The trend of imports outpacing the exports is leading to a narrowing of the trade surplus ($24.9bn in May, down from a revised $28.3bn in April). President Trump is pressuring China to narrowing its bilateral trade surplus with the US.
