Markets:
Global core bonds managed to eke out gains today with US Treasuries outperforming German Bunds. The main move occurred around the start of European trading as US equity futures hit an air pocket. US stock markets recently showed quite some resilience during the verbal trade war, but show more signs of vulnerability. It comes at a strange moment with President Trump for example backing down on his warning to curb Chinese investments in the US tech sector. The downleg in equity futures occurred in lockstep with new selling pressure in emerging market currencies like ZAR, BRL and (initially) TRY. So the upleg in core bonds was nevertheless safe haven related. US equity futures showed an intraday recovery and main European indices are in the green, but core bonds didn’t really return to opening levels. They hanged on to gains even if also higher oil prices and the US Treasury’s end-of-month refinancing operation are on the other side of the balance. Mixed US durable goods orders even pushed US Treasuries again to the intraday high. The German yield curve bull flattens at the time of writing with yields 0.3 bps (2-yr) to 3.8 bps (30-yr) lower. The US yield curve shifts in similar fashion with yields declining by 2.1 bps (2-yr) and 3.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads vs Germany narrowed up to 4 bps.
EUR-USD. Trading in major FX cross rates like EUR/USD and USD/JPY was again mostly technical in nature. The euro rebound that developed at the end of last week and early this week has stalled. Early in the session, risk sentiment remained cautious. Remarkably, the dollar remained better bid even as US equity futures underperformed European equities. EUR/USD drifted lower in the 1.16 big figure. Later in the session, sentiment on global equities (including US ones) improved as the Trump administration announced it prefers to use a less aggressive procedure to make its assessment on Chinese/foreign investments. Equities rebounded, but the better risk sentiment didn’t change the USD positive sentiment. US eco data (trade balance, inventors and durable goods orders) confirm expectations for good Q2 US growth. In a daily perspective, the dollar gained against the euro (EUR/USD 1.1600 area) and the yen (USD/JPY 110.35 area). So, the dollar retains the benefit of the doubt whatever the ST developments in the trade war. (ST) interest rate differentials between the US and Germany narrowed further, but at least today , it had little (negative) impact on the dollar.
GBP. EUR/GBP held north of the 0.88 big big figure today. The pair hovered in a tight range in the 0.8803/0.8827 area, but hovered near the recent top even as EUR/USD lost substantial ground. It suggests underlying sterling softness. Markets doubt the chances for an August rate hike. CBI June retail data were OK, but as usual didn’t help sterling much. EUR/GBP trades currently in the 0.8815/20 area. Cable dropped to the 1.3150 area, admittedly mostly on broad USD strength.
News Headlines:
The Czech National Bank raised its policy rate from 0.75% to 1%. The bank board mainly pointed to inflationary risks stemming from the weaker-than-expected koruna, faster-than-expected domestic inflation and stronger inflationary pressures from abroad. CNB governor Rusnok added though that the future pace of Czech rate hikes is hard to predict, reversing the Czech koruna’s initial gains.
The US Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, slipped 0.2% last month (vs +0.5% M/M forecast). Data for April was revised to show the so-called core capital goods orders surging 2.3% instead of the previously reported 1.0% rise. The US’s trade deficit unexpectedly narrowed from -$67.3bn in April to -$64.8bn in May. (Reuters)
