Markets
Facebook’s poor Q2 results probably dented US risk/equity sentiment somewhat as US Treasuries marginally recovered some of the ground lost after yesterday’s drop following the EU-US agreement (10-yr -2bps). US initial jobless claims and core durable goods were broadly in line to better than market expectations but had only limited to no impact. After opening higher in a catch-up move with the US, European yields awaited the ECB only to find out no changes to the outlook, statement and forward guidance were made. Draghi welcomed the EU-US agreement, calling it “a good sign”. He avoided questions concerning the ECB’s reinvestment policy saying the matter was not discussed. Draghi didn’t not feel the need to explain or modify the current forward guidance (“through the Summer of 2019”). However, when mentioning “markets are tightly aligned with the ECB rate guidance”, German yields did fall, completely wiping out this morning’s rise. Markets apparently concluded that, at least for now, the ECB intends to raise rates only at the end of the Summer of 2019 rather than in June.
Yesterday evening, EUR/USD rebounded to the 1.1740 area after US president Trump and EU Commission President Juncker agreed to start negotiations aiming to reduce mutual trade barriers and avoiding a further escalation of the trade conflict. However, there were few follow-through euro gains this morning even as European equities opened with good gains. EUR/USD failed to break beyond minor resistance in the 1.1750 area. At its regular meeting, the ECB left its policy and policy guidance unchanged. The June forecasts on growth and inflation were also left unchanged but the ECB president sounded rather optimistic on the economy, despite the uncertainty on trade. The euro temporarily gained a few ticks, but this gain was reversed as the ECB president kept a soft stance on the guidance for the first rate hike. Answering a question, the ECB president also dismissed remarks from US president Trump that Europe artificially weakens its currency. The US and EMU are at a different point in their economic cycle allowing a divergent policy approach. EUR/USD eased slightly during the press conference. The pair trades again below the 1.17 mark. US data were mixed, but didn’t change marked expectations for solid Q2 GDP growth, to be published tomorrow. USD/JPY regained slightly ground this afternoon and is again trading in the 111 area.
As was the case yesterday, it was again an uneventful session for sterling trading today. There was no high profile news on Brexit and no eco data. EUR/GBP is holding a tight sideways range just below the 0.8 big figure. Cable lost some ground this afternoon on overall USD strength (1.3150 area).
News Headlines
China’s central bank is again easing capital requirements for commercial banks to boost lending to businesses, as its economy is slowing and the trade war remains in play. Sources told Reuters that specific capital requirements will be eased, adding to three previous cuts in banks’ required reserve ratios.
US jobless claims have increased to 217,000 last week (215,000 expected). The small increase comes after a historic low (208,000 ) the week before, unmatched since 1969. Shipments of non-military capital goods rose 1% (0.4% expected) after a 0.2% increase in May indicating that trade war concerns only have a weak influence.
The EU has flagged a key part of Theresa May’s plan, how customs will operate after the split, as unsatisfactory. The idea was devised to keep all groups in PM May’s divided cabinet happy. Even as the EU welcomed the overall blueprint, some details raised concerns. Brexit Secretary Dominic Raab meets EU negotiator Barnier later today.
