Markets
Global core bond trading was confined to very narrow ranges today. US Treasuries marginally underperform ahead of tonight’s 5-yr Note auction. The eco calendar only contained German Ifo, which printed near consensus. Details added a negative accent with the expectations component slightly underperforming the current situation index. Investors await the outcome of tonight’s encounter between Trump & Junckers, tomorrow’s ECB meeting and Friday’s US Q2 GDP release. Will last week’s hypothesis that investors start demanding a higher US risk premium hold in case of an adverse outcome of tonight’s meeting? The German yield curve bull flattens with yields up to 1.2 bps lower (30-yr). The US curve flattens as well with yield changes ranging between +1.2 bps (2-yr) and -1.4 bps (30-yr). 10-yr yield spread changes vs Germany narrow up to 3 bps.
Global FX traders kept a cautious wait-and-see approach. There is too much upcoming ‘binary’ event risk in the hours and days to come for investors to place big directional bets in the dollar or on other markets. In line with yesterday’s German PMI, the Ifo business climate was not too bad. The index declined marginally (101.7), mirroring uncertainty on global trade tensions. Even so, the index remains at a decent level. EUR/USD tried to regain the 1.17 level after the publication of the release, but the move had no strong legs. Whatever, the price action was overshadowed by the meeting between US President Trump and EU Commission President Juncker later today. The meeting is a possible pivotal point in the US-EU trade conflict. Investors turned a bit more cautious as the meeting is coming closer. Core bond yields and EUR/USD drifted sideways. Equities and USD/JPY are trading with a tentative negative bias. EUR/USD hovers near 1.17. USD/JPY is testing the 111 area. However, it is highly likely that both cross rates will close at different levels this evening, whatever the outcome of the Trump-Juncker meeting.
Sterling gained further ground yesterday after UK PM May said that she will take control of the Brexit negotiations. Hard-line Brexiteers evidently will still try to push the Brexit process in their own direction. Even so, the move of the UK PM potentially raised chances on a rather soft Brexit. Today , there was little important additional news on Brexit. CBI retail data (July) were stronger than expected. UK loans for housing finance also picked up in June. The data add to other recent evidence that the UK economy regained enough momentum in Q2 for the BoE to implement a cautious rate hike at next week’s meeting. Even so, sterling wasn’t able to extend yesterday’s rebound. EUR/GBP holds a very tight range just below the 0.89 big figure. Cable gained a few more ticks and trades in the 1.3175 area.
News Headlines
European Union trade commissioner Cecilia Malmström said that the European Commission is drawing up a list of $20 billion of U.S. goods that could be hit with import tariffs in retaliation against possible US levies on car import from the EU. Later today, Trump and Juncker will meet in Washington to discuss possible solutions.
Euro zone business lending growth rose 4.1% in June compared with 3.7% the month before. That’s the fastest growth since May 2009, backing the European Central Bank’s judgment that the economy in the euro area is in the right condition to withstand the end of the bond purchases at the end of this year.
The German IFO business climate for July lost ground for a second month in a row and declined to 101.7, compared to 101.8 in June, though a bigger drop to 101.5 was expected. Germany’s economy is fearing a growing threat of US import tariffs on European cars, pushing the index to its lowest level in 16 months.
