Markets
Today, core US/German bonds lost modest ground. The rise in yields was supported by a positive sentiment on European and US equity markets (after a poor performance in Asia). One could expect the debate on a September 2019 ECB rate hike to have been a negative for European/German bonds. However, remarkably, US yields rose more than European ones. Also the repositioning at the short end of the European yield curve remained modest. US eco data (ADP, jobless claims) were close to expectations with little impact on bond trading, especially as markets looked forward to the US Non-manufacturing ISM and, even more, to the Fed minutes, to be published later this evening. At time of writing, the US yields curve rises approximately 1.5-2.0 bp across the curve. The European yield curve shows a marginal bear flattening (+ 1 bp 2-y; -0.5 bp 30-year). On intra-EMU bonds markets, peripheral bonds didn’t profit from the overall positive risk sentiment. Greek (5 +bp), Spanish, Portuguese (+3bp) and Italian (+4bp) spreads all widened modestly (10-y).
The euro captured a good bid today. EUR/USD jumped from the mid 1.16 area to the 1.17 area early in European dealings. The move was probably supported by the debate on an ‘early’ ECB rate hike. However, other/technical factors were also in play. The rally on European equity markets (inspired by press reports on a possible US-EU tariff deal for the automobile sector) as supported the euro . Despite the ‘ECB interest debate’, US interest rates rose more than European ones. However, this time this was no big issue for EUR/USD trading. In the US, ADP job growth was close to expectations. EUR/USD gained some further ground and tested the 1.1720 resistance area. For now, a break didn’t succeed. Remarkably, USD/JPY profits only in a very limited way from higher US yields and a positive risk sentiment. The pair is trading in the 110.60 area.
There were few economic indicators in the UK today. Early in Europe, EUR/GBP jumped from the 0.8815 to 0.8840 area. This move was mainly due to euro strength in the wake of the overnight headlines on a potential early ECB rate hike. Later, BoE governor Carney in a speech indicated that he saw signs of improvement in the economy, confirming that softness in the first quarter was probably mainly weather-related. He also repeated that, if the economy develops as expected, ongoing monetary tightening might be appropriate. However, he wasn’t specific on the timing of a rate hike. Still markets considered his assessment as raising the chances on an August rate hike. The comments triggered a limited and temporary rebound of sterling. However, ongoing political tensions/discord on the government’s Brexit strategy prevented a more sustained GBP-rebound. Negative Brexit comments from UK corporations also weighed on sterling. EUR/GBP trades again the 0.8850 area. Cable hovers in the 1.3220 area.
News Headlines
US labor market remains strong. The ADP employment report showed net job growth +177k, down from an upwardly revised +189k last month (190k was expected). The small slowdown could be due employers having difficulties in finding qualified workers. The ISM Non-Manufacturing index for June was also better than expected at a strong 59.1 coming from 58.6 last month and expectations of 58.3.
Oil holding within reach of highest level in three and a half years today with Brent crude reaching $78.17 a barrel today, despite US president Trump’s demands that OPEC would raise output to push the price down. The price increase is probably supported by uncertainty over Iranian supply and output problems in Canada.
China is excluding US LNG from its tariff list. Or China continues its intentions to make a shift from coal to gas for its ‘war on pollution’, or it wants to preserve a potential weapon should the trade war with the US escalate further. Import numbers for LNG are not impressive but they are expected to grow rapidly over the coming years.
