Markets
Yesterday, global markets started in risk off modus as investors pondered the impact from the trade war especially on Asian/EM economies. The German political crisis was also a source of uncertainty. However, global risk sentiment improved throughout the session. The US Manufacturing ISM was strong/better than expected (60.2). Initially, the report had little impact on markets. Later in US dealings, equity sentiment improved further and (US) bonds lost some further ground. The US yields curve bear flattened with yields rising between 2 bp (2-y) and 0.4 bp (30-y). Changes in German yields were negligible with the short end slightly out performing (2y -1.5bp). After the close of the European markets, the CDU-CSU coalition partners reached a compromise on migration policy. So, an immediate political crisis is probably averted.
This morning, Asian markets fail to join the risk rebound in the US yesterday. China again underperformed, but sentiment tentatively improves toward the end of the session. Later today, the eco calendar is thin. EMU retail sales are no market mover and neither are US factory orders. Sentiment on risk and headlines on global trade will have to guide trading. Until now, sentiment on US equity markets remains fairly constructive, but uncertainty on EM/China probably will keep the downside in core bond rather well protected. Some further consolidation near recent levels might be on the cards for the Bund and the US 10-y Note future.
Yesterday, the dollar succeeded a gradual intraday uptrend for most of the session. EUR/USD filled bids just below 1.16 at the end of the European session. EM uncertainty and at the same time a slight rise in US yields supported the US currency. Late in the session the euro spiked higher as a German political crisis was avoided. EUR/USD finished the day at 1.1639 (from 1.1684). USD/JPY closed at 110.90.
This morning, the (trade-weighted) dollar (DXY) trades little changed just below 95. However, the ‘free-fall’ of the yuan continues unabatedly. USD/CNY jumped north of the 6.70 mark! Markets are looking for indications of the PBOC taking action to stop the sell-off. The likes of the Korean won also remain under pressure, but spill-over effects to the euro (or the yen) remain limited. EUR/USD is blocked in the 1.1500/1.1720 ST consolidation range. That said, the dollar probably will remain the benefit of the doubt.
Yesterday, sterling declined against a broadly stronger dollar but hovered sideways against the euro. The UK manufacturing PMI was slightly stronger than expected (54.4) but was largely ignored. Today, the UK construction PMI is expected unchanged at 52.5. There will again be plenty of Brexit headlines as UK PM May tries to find consensus on a Brexit plan ahead of a key Cabinet meeting later this week. More EUR/GBP consolidation in the mid 0.88 area might be on the cards as long as visibility on the Brexit remains low.
News Headlines
Angela Merkel and her interior minister Seehofer have finally agreed on a migration deal, after the CSU-CDU coalition was in danger yesterday. The deal agrees that asylum seekers who are already registered in another EU country will be held at transit centers on the German-Austrian border before they are sent back.
US manufacturing remains strong despite the trade war worries, according to the ISM Manufacturing index. The ISM index rose to 60.2 in June from 58.7 in May while economists expected a drop to 58.5. This strong outcome proves the US economy is not slowing down despite nervousness about trade wars.
US President Trump has fueled the rumors that the US is thinking about leaving the WTO. Trump openly stated that “the WTO has treated the US very, very badly”. He suggested they would take action if they don’t treat the US properly. However, Trump’s commerce secretary said reforms are needed but a withdrawal is not on the table.
