Rates: Core bond sell-off accelerates
Upside risks to EMU PMI’s, the start of the US Treasury’s end-of-month refinancing operation, positive risk sentiment and technical factors all suggest that the two-day sell-off on core bond markets isn’t over yet. US Treasuries could underperform German Bunds.
Currencies: USD dollar to receive additional interest rate support?
Yesterday, core yields jumped higher after a long consolidation period. The move mainly favoured the yen and the dollar even as the moves in the major USD cross rates remained modest. The dollar might remain well supported going into the publication of the USD Q2 GDP later this week
The Sunrise Headlines
- US stock markets closed mixed on Monday with marginal gains and losses. Asian markets all opened in green, with China out performing marking gains around 1.5% on its major indices.
- After its central bank injected a monetary stimulus of $74bn yesterday in its banking system, China unveiled a package of fiscal policies to boost domestic demand as trade tensions threaten to worsen the economic slowdown.
- BoE’s Broadbent yesterday stated that reversing QE would not be a hawkish signal as interest rates remain the central bank’s main policy tool. He also said not to have decided on his voting intentions for the policy meeting next week.
- Eurozone consumer confidence remains unchanged at -0.6 in July (-0.7 expected) after the June number was revised from -0.5 to -0.6, indicating economic growth may be stabilizing going into the third quarter.
- Japan’s manufacturing sector grew at its slowest pace since November 2016, with its preliminary PMI dropping from 53.0 to 51.6 in June. Output and new orders grew at a slower pace while export orders decreased at a slower rate.
- Italy’s Deputy Premier Matteo Salvini stated that he would flout EU budget rules if it were “for the good of the Italians”, causing a struggle within the government where finance minister Tria preached to stay within those EU limits.
- Today’s eco calendar contains the Richmond Fed Manufact. Index for July in the US and PMI numbers in the eurozone
Currencies: USD Dollar To Receive Additional Interest Rate Support?
Dollar to receive additional interest rate support?
Yesterday, bond yields at once rose from Japan to the US. Speculation on a policy adjustment at next week’s BOJ meeting initially propelled the yen. However, the USD/JPY decline was reversed as US (and European) yields joined the rise. US-German spreads are again nearing the cycle peak (especially for the 2-y). At the end of the day, the moves in the major USD cross rates were modest, given the swings in yields. USD/JPY closed the day little changed at 111.35. EUR/USD closed at 1.1692, reversing part of Friday’s ‘Trump-driven’ USD decline. Overnight, Asian equities show good gains, with China outperforming. Investors see more room for PBOC stimulation if necessary. The yuan dropped to the lowest level in more than a year (USD/CNY 6.82). USD yields are marginally lower after yesterday’s rise. USD/JPY stabilizes in the lower half of 111. EUR/USD is losing a few ticks (1.1680 area).
Today, EMU PMI’s and the Richmond Fed manufacturing index will be published. The EMU composite PMI is expected to ease marginally to 54.8. Markets will still look for further impact from trade tensions on sentiment. We also keep an eye at the US bond auctions, starting with the sale of 2-year Notes. Question is whether core yields will continue yesterday’s rise and whether the US/German spread will rise further. Investor anticipation on a strong Q2 US GDP on Friday might support US yields. This might be a USD supportive in the shortterm. A positive risk sentiment might be slightly in favour of the euro. Headlines on trade remain a wildcard ahead of tomorrow’s meeting between US president Trump and EU’s Juncker. Of late, USD/USD hovered in the 1.15/1.1850 trading range. This range won’t be easy to break. In a day-to-day perspective, EUR/USD might again drift a bit lower in this range. However, last week’s Trump comments might still cap a big leap higher of the USD. The upside momentum of USD/JPY also looks to be broken.
Yesterday, sterling regained slightly ground against the euro. Cable declined on a stronger dollar. New UK foreign Secretary Hunt said that there is a real risk of no Brexit deal. However, the headlines didn’t hurt sterling anymore after last week’s decline. BoE’s Broadbent didn’t give a clear hint on his vote for next week’s BOE meeting. Today, CBI order data/sentiment will be published. If data are OK and in case of no high profile negative Brexit headlines, a further modest technical comeback of sterling (against the euro) might be on the cards.
EUR/USD: Dollar receives interest rate support, despite last week’s comments from president Trump
