Markets
Today, there was no clear directional bias in European bond trading. The Bund future contract opened marginally lower, but held within reach of recent peaks. The flattening trend at the long end of the European yield curve that dominated trading over the previous days slowed, but there is no sign of a correction yet. With no guidance from the US, changes in the German yield curve are less than 1 bp. A modest upward revision in the EMU services PMI was not enough to trigger a meaningful rise in European yields. Calm also returned to intra-EMU bond markets. Spread changes versus Germany are also negligible.
Trading in the major dollar cross rates also developed in thin market conditions as US markets are closed for the 4th of July holiday. This morning it looked that the dollar could stay in defensive as the yuan rebounded further. However, the rhetoric on the yuan changed again early in European dealings. Sources close to PBOC policy were said to have indicated that the Bank didn’t intend to use aggressive interventions to curb the decline of the yuan. China was said to be fairly comfortable with a weaker yuan as it helps to counterbalance a weakening of the economy. In this context, it is understood that the PBOC should only act to prevent disorderly moves. The ‘rumours’ on the PBOC being less inclined to intervene in the FX market trigger a modest repositioning in favour of the dollar. USD/CNY reversed the earlier decline and the move also left its trace on other USD cross rates. EUR/USD dropped to the 1.1630/50 area. The EMU services PMI was upwardly revised to 55.2 easing fears for a more protracted slowdown of the EMU economy. However, the revision had little impact on euro trading. With no impetus from the US, EUR/USD settled in a sideways consolidation pattern. The pair trades currently in the 1.1640. USD/JPY hovers in the mid 110 area.
Yesterday, sterling profited from hawkish comments from BoE MPC member Saunders. Today, sterling was further supported by a solid UK services PMI. The indicator rose to 55.1 from 54.0. The UK June composite PMI also improved to 55.2 from 54.5 (a stable reading was expected). According to IHS markit, this points to a UK Q2 growth of 0.4% Q/Q. The combination of a rebound in Q2 growth and growing prices pressures also raised chances on an August BoE rate hike. The market currently discounts approximately a 70% probability of an August hike. Sterling extended its rebound after the publication of the PMI’s. End last week, it looked that EUR/GBP would break beyond the 0.8850 range top due to ongoing uncertainty on Brexit and growing global uncertainty. However, the test was rejected. EUR/GBP is now drifting back lower to the 0.88 area and is again trading within the previous 0.87/0.8850 ST trading range. Cable gained the 1.32 big figure. Later this week, the focus will again turn to the Brexit saga. UK PM May is expected to hold a key Cabinet meeting on Friday, trying to reach an agreement within her government/Conservative party on what relationship the UK wants with the EU after Brexit.
News Headlines
Markit Eurozone Services PMI (F) rose from 55.0 in May to 55.2 in June, even though analysts had expected no increase. Spain (55.4 in June from 56.4 in May) and France (55.9 in June from 56.4 in May) are losing ground and missed consensus expectations. PMI confidence in Italy (54.3 in June from 53.1 in May) and Germany (54.5 in June from 53.9 in May) picked up!
Rumour had it that China would retaliate with tariffs on US import at the same day the US would start with its tariffs. However, the time difference puts Beijing ahead in terms of actually implementing it. Later today, Chinese officials refuted these rumours and said it will wait on US tariffs to take effect before taking counter-measures.
