Markets
Today, especially equity markets started the week in risk-off modus. Ongoing trade tensions between the US and China and the conflict potentially spreading to Europe was a good reason for investors to stay cautious on global equities. European stocks and US equity futures soon showed substantial losses. Core bonds only succeeded some modest gains early in European dealings. German IFO confidence declined from 102.3 to 101.8, in line with market consensus. The forward looking expectations component of the IFO was even slightly better than expected. Core bonds soon gave up their earlier gains. At the moment of writing, changes in US and German bond yields are less than 1 bp. Overall risk-off sentiment and a positive election result of the Italian Lega Party in local elections caused Italian assets to underperform. The 10-y yield spreads of Italian government bonds versus Germany rose another 10 bp. Changes in most other spreads are modest (2 bp or less). Today’s price action suggests that core (US and European yields) have already declined to relatively low absolute levels making it more difficult for core bonds to rise just on the theme of global, trade-driven risk-aversion.
EUR-USD. Today, EUR/USD proved to be quite resilient, even as the trade conflict between the US and China (and maybe also with the EU) might escalate further. Also in a broader perspective, the gain of the dollar in this risk-off context remains modest. USD/JPY dropped to the 109.40/50 area, but there was no follow-through yen buying later in the session. EUR/USD developed a similar trading pattern. The euro lost a few ticks early this morning, but the downside proved rather solid. EUR/USD also profited slightly from a decent German IFO release. Technical factors were probably also in play. IMM data Friday suggested a substantial reduction of EUR/USD longs. However, it didn’t help to push EUR/USD below the 1.1510 support in a sustainable way. This suggests decent buying interest in the pair, at least for now. With the downside blocked, EUR/USD currently even trades in the 1.1685 area. USD/JPY also trades only marginally weaker in a daily perspective (109.65 area). So, for now there is some tentative decoupling from EUR/USD and USD/JPY from the global risk off trade.
GBP. There was little economic news to guide sterling trading today. A global risk-off sentiment remains a tentative negative for the UK Currency. Together with a slight intraday rise in EUR/USD, it was/is enough to bring EUR/GBP again to 0.88 area. A less buoyant USD sentiment even helped a cautious rebound in cable (1.3275 area).
News Headlines
Harley Davidson announced that it will shift production of certain motorcycles away from its US-based manufacturing sites as a result of EU’s decision to impose counter-measures. It says the financial impact of the tariffs would be up to $100m per year. This move shows that the trade war is starting to have real effects on the economy.
German business confidence reached a one-year low in June (101.8 and down from 102.2 in May), according to the Ifo business climate poll. This survey, which measures the mood among company executives, declined in all four sectors (manufacturing, services, trade and construction). The decline was in line with market expectations. The forward looking expectations component even stabilized at 98.6 (vs 98.0 expected).
Moody’s has given its support to the Greek debt relief deal of last week. It said that the Eurozone agreement “paved the way for Greece to return to capital market funding” and “the additional and much closer supervision and monitoring provides assurance that the Greek authorities will stick to its fiscal and economic reforms”.
