Markets
The Bund performed well in the first trading hour as BTP’s sold off following rumours that Lega leader Salvini and 5SM Di Maio opted to cut loose one of the moderate voices inside their populist government, FM Tria. The uptick in the Bund was erased by noon when US President Trump suggested to impose tariffs on all Chinese goods, worth $500 bn. Again, the uptick in core bonds was rapidly erased, but it didn’t turn out to be the end of the story. The US president decided to take a second shot at the Fed, saying that rate increases hurt the US when the country is about to issue more debt. He also took another swing at dollar strength, calling China and the EU currency manipulators!! The dollar and stock markets took a dive, but core bonds hold a very tight range. The US Note future gradually faces some selling pressure. The numerous outbursts and policy errors of US President slowly weigh on the country’s credibility. St. Louis Fed Bullard, arch dove, warned that an inverse yield curve would be a bearish signal to the US economy and argued in favour of slowing the tightening process. His stance is well known and currently a minority inside the FOMC. The US yield curve steepens at the time of writing with yield changes ranging between -0.6 bps (2-yr) and +3.3 bps (30-yr). German yields increase by 0.7 bps (2-yr) to 1.7 bps (10-yr). 10-yr yield spread changes vs Germany are virtually unchanged with Italy underperforming (+4 bps).
Yesterday, a constructive USD momentum was overthrown as US president Trump said that he was unhappy with the Fed raising interest rates. He also saw the strong dollar resulting from the Fed policy as a disadvantage for the US economy. Trump’s quotes triggered some modest losses. Initially the post-Trump setback of the dollar remained a one-off. The dollar basically stabilised this morning. However, later today US president Trump stepped up its trade war rhetoric. In an interview he said to be ready to impose tariffs on all Chinese imports. On twitter, he also accused China and the EU of manipulating their currency. These ‘new’ trade war headlines caused some shivers on the equity markets and finally also filtered through into the FX market. EUR/USD jumped north of 1.17. Initially, the decline of USD/JPY also developed in a gradual way, but the move accelerated after the new batch of Trump headlines. The pair tumbled below the 112 handle.
This morning sterling traded within reach of recent lows against the euro with EUR/GBP holding in the 0.8950 area. In a speech in North-Ireland, UK PM May called the EU to change its position on the backstop solution regarding the Irish boarder as it is unacceptable for the UK. The call illustrates that the issue is far from being resolved. However, this time it caused no additional sterling losses. Later, sterling even regained a few ticks as BoE’s Tenreyro said that soft Q1 growth was probably temporary. Markets saw this as an indication that she could vote in favour of an August rate hike. EUR/GBP lost slightly ground, but the move was hampered by the EUR/USD rebound. EUR/GBP trades in the 0.8935/40 area. Some sterling relief combined with USD softness helped cable to regain more than one big figure. The pair tries to regain the 1.31 barrier.
News Headlines
Reports on Di Maio (5-Star Movement) and Salvini (League) seeking Italy’s finance minister Tria’s resignation if he did not back government nominees for heading the state owned bank CDP rattled Italian bond and equity markets. Di Maio later denied.
US President Trump doubled down on trade rhetoric, saying he is “ready” to impose tariffs on all Chinese imports (totaling up to $500bn in 2017). Trump previously imposed tariffs on $34bn of Chinese imports, planned another $16bn and threatened to target $200bn.
Canadian inflation increased stronger than anticipated from 2.2% to 2.5% in June (vs. 2.3% expected), as did headline and core retail sales (up to 2% m/m and 1.4% respectively). The Canadian dollar jumped versus his US counterpart. USD/CAD declined more than a full big figure (currently 1.3130 area).
