Markets
Core bonds traded with a marginal upward bias today with German Bunds outperforming US Treasuries. The story of the past few days remains valid. Traditional correlations with other markets are extremely lose. Core bonds show resilience despite a constructive risk sentiment on stock markets. Traded volumes are low. The eco/event calendar contained only second tier data and failed to leave a trace markets. German yield decline by 0.4 bps (2-yr) to 1.2 bps (10-yr). The US yield curve shifts less than 1 bp lower across the curve. 10-yr yield spread changes vs Germany widen somewhat with Italy (+4 bps) underperforming. Clearing house LCH’s increase of collateral requirement for Italian bonds ends the BTP rally of the past week.
Yesterday , the dollar succeeded a short-term reversal/comeback, supported by Fed Powell’s positive assessment on the US economy. The dollar only received marginal interest rate support as bonds reacted very muted to Powell’s assessment. Even so, the US currency remained will bid, also today. There was little eco news in EMU. If anything, a downward revision of the EMU June core CPI from 1.0% to 0.9% was maybe a marginal negative for the euro. That said, dollar strength prevailed. EUR/USD declined to the low 1.16 area but decline slowed going into the second part of Fed Powell’s hearing before the US Congress (currently 1.2630 area). USD/JPY traded temporarily above the 113 big figure but is currently changing hands in the 112.85 area as US equities are taking a breather. Later today, FX markets will keep an eye at the Q&A session of Powell’s hearing before the House. Later today, the Fed Beige Book will be published preparing the August 1 Fed meeting.
Today, the news flow remained sterling negative. This morning, selling pressure on sterling eased temporarily after UK PM May narrowly survived a vote on a key amendment to her Brexit Bill. However, the political hardball that preceded the vote only illustrated the difficult position the UK government (and the whole Brexit process) are currently undergoing. EUR/GBP traded in the 0.8875 area ahead of the publication of the UK June inflation data. The report also didn’t help sterling. UK headline inflation was stable at 2.4% Y/Y in June (2.6% was expected). Core inflation even eased to 1.9% from 2.1%. Markets still discount a probability of about 80% for an August BoE rate hike despite the softer EU data. However, after the August rate hike, sterling probably won’t enjoy the prospect of additional interest rate support for a very long time. Sterling came again under pressure. EUR/GBP settled north of the 0.89 big figure (currently 0.8915). Cable is again nearing the 1.30 barrier (currently mid 1.30).
News Headlines
While discussing lessons from the 2008 financial crisis with former treasury Secretaries Paulson and Geithner, former Fed-chairman Ben Bernanke said the current flattening of the US yield curve does not signal an impending recession. Instead, regulatory changes and quantitative easing are distorting market signals. During the discussion Paulson pointed to the growing US debt, saying it “is the most predictable financial crisis in the world”.
The EU imposed a record fine of €4.3bn on Google for, amongst others, imposing illegal conditions on Android device manufacturers “to ensure that traffic on Android devices goes to the Google search engine”. In 2017, Google was already charged €2.4bn for favouring its own site in comparison shopping searches.
Clearing house LCH said it will increase collateral requirements for trades in Italian government bonds due to the sharp rise in BTP volatility in recent months as investors fear Italy’s new government might imperil public finances.
