Markets:
Over the previous days, core US and German bonds were modestly supported by safe haven flows as the trade conflict dominated the market headlines. Today, sentiment on risk improved, but it had no big (negative) impact on core bonds. Changes in US and European bond yields are mostly less than 1 bp. There was some intraday noise on comments from several ECB members. However, in the end, there was no good reason for markets to questions ECB Drahgi’s commitment at last week’s policy meeting to keep policy rates unchanged at least through the Summer of next year. In the same context, Fed president Powell at the Sintra conference repeated that the case for gradual Fed rate hikes is strong. The direct impact on US Treasuries stays limited. 10-y yield spreads changes versus Germany also hardly changed on a daily basis. Italy slightly outperforms (-2 bp).
EUR/USD. Today, sentiment on risk improved and global equities reversed part of this week’s losses. The euro was also a prominent ‘victim’ of the trade tensions, but doesn’t show any strong rebound momentum yet. Soft comments from ECB governors (at the Sintra ECB conference and elsewhere), were at least partially to blame. Remarkably, ECB’s Nowotny explicitly mentioned the (potential) negative impact from the divergent Fed-ECB policy as a driver for EUR/USD weakness. The headlines pushed EUR/USD briefly below the 1.1550 handle. However, with a better global risk sentiment; it was not enough to push EUR/USD for a test of the 1.1510 support area. EUR/USD settled in the upper half of the 1.15 big figure for the remainder of the session. USD/JPY also rebounded north of 110, but this move was not really convincing as well, despite the rebound in global equities. The lack of any meaningful rise in core US & Germany yields probably deprived USD/JPY (and EUR/JPY) of additional interest rate support.
Today, sterling traders were more or less obliged to take a wait-and-see approach ahead of a key vote on the ‘meaningful vote amendment’ in the House of Commons. EUR/GBP tested the 0.88 barrier this morning and then settled in a tight hovered range roughly between 0.8775 and 0.88. There were several articles/rumours indicating that the UK government was putting pressure on conservative pro-EU PM’s to support the government’s view. Question remains whether even a government ‘victory’ today will bring more calm/stability to the UK Brexit debate. Anyhow, sterling remained in the defensive. EUR/GBP trades in the 0.8785 area. Cable retested the 1.3150 area this morning and trades currently 1.3190 awaiting the outcome of the vote.
News Headlines:
After China’s retaliation measures on US tariffs on Chinese import, Europe will also start to charge import duties of 25 percent on €2.8bn worth of US goods. This rather limited retaliation is said to be in line with WTO rules and will be removed if the US backs down on and removes their import tariffs.
At the ECB Forum in Sintra, officials have stated that they have become increasingly concerned about a potential trade war. The outcome of Donald Trump’s current actions “could possibly derail the recovery in the euro zone and complicate an exit from the stimulus program”.
The CBI confirmed that optimism in the UK’s manufacturing sector has improved in the second quarter of this year with a balance of 13 (Reuters poll expected 1). However, they warn that the medium-term outlook remains clouded by Brexit and the ongoing trade war.
