Markets:
Global bonds started today’s trading session on the back of yesterday’s positive momentum. The ECB took one step forward (ending APP by the end of the year) but made two steps backward (extending lower for long rate guidance through the Summer of 2019) in its normalization process. ECB Nowotny argued today that the central bank actually hit its inflation target, confirming his hawkish stance and definitely not representing the consensus view in the GC. Risk aversion on stock markets, triggered by the new tariffs from the US and retaliation threats from China, created an additional safe haven flow. US Treasuries slightly underperformed German Bunds, but there’s no direct link with mixed US eco data (strong empire manufacturing survey and disappointing industrial production). German yields drop by 0.4 bps (2-yr) to 3.2 bps (10-yr) at the time of writing. Changes on the USD yield curve range between -1.3 bps (2-yr) and -2.7 bps (10-yr). 10-yr yield spread changes vs Germany narrow by 1 bp with Greece, Portugal (-5 bps) and Italy (-9 bps) outperforming.
EUR/USD. Today, trading in the major euro and USD cross rates took a breather after yesterday’s ECB’s guidance to rates unchanged through the summer of next year. EUR/USD changed hands in the mid 1.15 area at the start of European dealings. For now there was no further follow-through euro selling even as the interest rate differential between the USD and the euro widened further. EUR/USD even regained slightly ground. EMU CPI was confirmed at 1.9% Y/Y (headline) and 1.1% (core). Whatever, after yesterday’s ECB’ decision EMU data lost most of their relevance for ST market movements. The focus turned to the US. Sources close to the US government signaled that the US was to announce import tariffs on $50 bln worth of Chinese imports, which was confirmed later in the session. The story dented yesterday’s positive equity sentiment, but had little impact on FX. USD/JPY drifted off an intraday peak in the high 110 area after BOJ Kuroda’s press conference. The US Empire manufacturing survey printed again very strong, but had hardly any impact on the dollar. May US production data disappointed. EUR/USD trended cautiously higher, currently trading near 1.1620/25. USD/JPY hovers in the 110.50 area. (FX) markets are now looking forward to the reaction of China to the new US import tariffs and to its potential impact on global risk sentiment.
GBP. Yesterday, the overall post-ECB decline also pushed EUR/GBP lower in the 0.87 big figure. This morning EUR/GBP initially hovered in a rather tight range in the 0.8750/25 area. There were still plenty of headlines on the Brexit stalemate within the UK conservative party. Initially, it didn’t help to euro to regain ground against sterling. EUR/GBP even touched a new ST correction low this afternoon. Later, EUR/GBP joined the intraday euro rebound. EUR/GBP trades currently again in the mid 0.87 area. Next support at 0.8710/0.8695 (MT correction lows) remains within reach. Cable dropped temporary below the 1.3242 MT support, but a clear break didn’t occur yet (currently 1.3285).
News Headlines:
The NY Empire Manufacturing survey (25.0) exceeded expectations (20.1) by quite a margin. Moreover, important subcomponents such as prices paid (an inflation gauge), new orders (growth gauge) and number of employees (employment gauge) are all pointing to a solid US manufacturing sector. On the other hand, May industrial (-0.1%, vs 0.2% expected) and manufacturing (-0.7% vs no change expected) production data disappointed. The Fed indicated “special factors” were in play (supply disruption).
President Trump officially announced a 25% tariff on $50 billion worth of Chinese imports. The import taxes will be implemented in two stages: tariffs on a $34 billion tranche of 818 products lines will be in effect as of July 6. The remainder will be subject to a public comment period and will take effect later.
