Markets
Yesterday, US and German bonds initially remained well bid as investors pondered the consequences of recent correction on emerging markets. Later, risk sentiment improved. US equities rebounded and US bonds closed the day with modest losses. US yields rose up to 1.9 bp (5y) with the long end outperforming (30y, -0.1bp). German yields (earlier close) finished mixed with the long end also doing best (30y -1.6bp). This morning, Asian equities are joining the risk rebound for the US. Pressure on Asian markets eases as the dollar rally did run into resistance. The rebound in Chinese equities was supported by Chinese authorities easing some foreign investment restrictions. Late today, global sentiment on risk (including the performance of EM) will remain a key factor for core bond trading. Regarding the data, the EMU June headline inflation is expected to rise further from 1.9% Y/Y to 2.0%, but core inflation might ease from 1.1% to 1.0%. A big upward surprise is probably needed for the inflation data to have a big impact on European bonds as the ECB committed to keep rates unchanged through the Summer of 2019. In the US, May personal spending and income, the Chicago PMI and the final Michigan consumer confidence will be released. Especially the PCE deflators are interesting. The headline index is expected to rise from 2.0% to 2.2%. The core measure is seen at 1.9% (from 1.8%). In a positive risk context, the PCE deflators coming closer to/rising above 2.0% might put some additional pressure on US bonds. In longer term perspective, EM tensions probably have to move further to the background first, for core yields to start a more protracted upleg.
Yesterday, the USD rally did run into resistance as the US currency neared/reached important technical barriers. (95.15/50 for the DXY trade-weighted dollar, low 1.15 area for EUR/USD). A gradual easing in global risk aversion (especially in the US) also helped to prevent further USD gains (except for USD/JPY). This morning, the dollar is losing further ground against most majors, including the CNY. Remarkably, the USD correction was for an important part the result of a short squeeze in EUR/USD after EU leaders signalled they had reached an agreement on EU immigration policy. This EUR/USD rise also spilled over to other USD cross rates. This USD correction on the EU migration story suggests that the market had probably become positioned a bit too much long USD. Question is whether a USD move mainly based on this trigger (EU immigration agreement) can be sustained further down the road. We remain cautious on further USD losses (EUR/USD rise) for now. In this respect, we keep an eye on the dollar reaction in case of a further rise in the US PCE deflators. Yesterday, EUR/GBP finally broke out of the 0.87/0.8850 consolidation pattern. Ongoing poor progress in the Brexit process (Brexit was only a ‘secondary item’ at the EU summit) and end of month repositioning finally helped the break above 0.8850. Overnight GFK consumer confidence disappointed. EUR/GBP was also propelled by the euro rise after the announcement on an EU migration deal. Next resistance comes in at 0.8968 (March correction top).
News Headlines
At the gathering in Brussels, EU leaders this morning reached a deal on the migration topic. Rescued migrants on EU territory should be sent to “controlled centres” in the bloc. For those in need of international protection, the principle of solidarity would apply (an Italian demand) but on a voluntary basis (a central European demand).
Facing mounting complaints by the US, Germany and other trading partners, China eased limits on foreign ownership in several sectors (including car manufacturing and insurance). The move comes after US president Donald Trump softened his stance in regard to restrictions on Chinese investments in the US.
The eco calendar is moderately interesting. The Chicago PMI (US) is likely to drop from 62.7 to 60.0. US personal income and spending data will also be published. The US core PCE deflator is expected to edge up from 1.8% YoY to 1.9%. EMU headline inflation might touch the 2% mark. Core inflation is expected to ease to 1.0% (from 1.1%).
