Markets
Global core bonds lost some ground today. The initial downleg lasted until around European noon. The improvement in risk sentiment in Asia and at the start in Europe played a role. The Bund bottomed as stock markets failed to maintain early gains. The US yield curve shifts 2.5 bps (2-yr) to 3.1 bps (rest of the tenors) higher. Changes on the German yield curve vary between +0.8 bps (2-yr) and +2.5 bps (30-yr). Weekend comments by ECB Coeure contributed to the bear steepening. He denied last week’s rumours of a European “Operation Twist” in which the ECB would lengthen the average maturity of its bond portfolio after the end of the asset purchases. He added the ECB won’t be derailed from the exit strategy mapped out in June as escalating trade risks were already incorporated. ECB Draghi repeated the core items of the previous policy meeting before European parliament. Risks to the growth outlook remain broadly balanced and there are more and more signs that (underlying) inflation is picking up. The inflation path on top appears to be self-sustained.
Global risk sentiment was the main driver for USD trading. Global equity investors ignored the possible consequences from China and the US moving to a next stage in their trade conflict, imposing mutual tariffs on each other’s products. Asian equities rebounded further this morning and so did the yuan. The positive sentiment also spilled over to European equities and US equity futures. The risk-on supported a continuation of the euro rebound. Safe have demand for the dollar eased. Benign wage growth in Friday’s US payrolls also kept Fed rate hike expectations in check. The trade-weighted dollar is drifting further south of 94. EUR/USD developed a gradual intraday uptrend. Early afternoon, it looked that the 1.18 barrier could be tested. However, for now, the big figure stays out of reach (EUR/USD currently trades again in the 1.1775 area). As was the case Friday, USD/JPY still hardly profits from the risk-on sentiment. The pair is holding a very tight range in the mid 110 area.
Sterling failed to developed a clear directional trend. Understandably, there were still plenty, mostly diffuse headlines on which way Brexit will go. May was said to stick to the (soft?) Brexit plan that the government agreed last Friday. However, Brexit Secretary Davis resigning illustrated that May’s battle with the pro-Brexit camp in her government/party is far from over yet. So, for now, there is little reason for investors to buy sterling, hoping that last Friday’s political agreement might have raised the chances on a soft, or at least orderly Brexit. The UK Brexit course and even the political fate of UK PM May remain as uncertain as they were before last Friday’s meeting. EUR/GBP hovered in the lower half of the 0.88 big figure (currently 0.8825). So, not much has changed since last week, not in UK politics neither for sterling trading. Cable regained some further ground, but this was probably due to USD softness rather than a GBP rebound.
News Headlines
Former Brexit Secretary David Davis said his resignation was not meant to weaken Theresa May, easing off earlier calls by a pro-Brexit MP’s to replace May as PM. Instead, he wanted to make clear the UK shouldn’t make more concessions to the EU because the UK already gives “too much away, too easily”. Meanwhile, May already appointed Dominic Raab, considered a hard Brexiteer, as Davis’s successor.
German trade data in May came in better than expected. Exports rose 1.8% (vs. 0.7% expected), beating increased imports (0.7% vs. -0.5%), thus widening the country’s trade surplus. The data suggest that German trade was still in relatively good shape before global trade tensions moved into a next stage.
