Markets
Core bonds soon came under pressure in Europe this morning. The move was a bit ‘surprising’ given the price action at the end of last week. European bunds at that time enjoyed decent downside protection as Draghi didn’t feel any need to amend its lower for longer strategy on interest rates. On Friday, the US yields curve even bull flattened on a solid US Q2 GDP. This morning bond sentiment turned a bit different. The Japan 10-y yield again tested the 10 bp level and the BOJ stepped in with an unconditional buying promise to prevent a further rise. The Bund future came also soon under pressure. A big selling order in gilts was rumoured to have affected overall sentiment. Whatever the reason, global core bonds suffered even as data and/or global market sentiment at first sight didn’t support this move. The confidence data from the EC were mixed/close to expectations. Spanish (2.3% Y/Y) and German inflation (2.1% Y/Y) were also in line to slightly softer than expected. This afternoon, US bond bonds followed the broader move, but slightly outperformed Bunds. US eco data were second tier and with little impact on trading. The US yield curve bear steepens with yields rising between 1.0 bp (2-y) and 3.2bp (30-y). Bund yields are rising between 1.7 bp (2-y) and 5 bp (10-y). Intra-EMU yield spreads changes were modest despite the correction on core markets. We look whether today’s price action might be the start of a more pronounced repositioning on the bond markets after recent calm. Italy (-1 bp 10y) even slightly outperformed on a decent BTP auction.
The moves in EUR/USD and USD/JPY were modest given the swings in the bond markets. EMU eco data (EC confidence and German CPI) were close to expectations. A slight narrowing in the US German interest rate differential may have supported the EUR/USD cross rate. The inability of the dollar to gain on Friday’s US GDP release might have signaled short-term players that the downside in this cross rate was rather well protected. Whatever, EUR/USD changed again course, drifting higher in the 1.105/1.1850 range. Whatever, the consolidation pattern is still very well in place. USD/JPY hovers in the 111 area, awaiting the outcome tomorrow’s BOJ meeting.
Today, sterling trading was mostly driven by technical considerations. UK eco data (Money supply & lending data) were mixed. Brexit noise persists by and is currently not giving a clear guidance for sterling trading. EUR/GBP gained a few ticks on the intraday EUR/USD rebound. The pair hovers again near the 0.89 big figure. Cable trades little changed to marginally stronger on USD softness.
News Headlines
The BOJ has intervened in the bond market for the third time in a week today, purchasing $14.76bn in government bonds. The bank announced it after the 10-year yield moved above 0.11%, while the target is about 0%. Today and tomorrow the central bank is having its policy meeting, announcing the outcome tomorrow.
Swedish GDP increased by 1% in the second quarter of this year, while only a 0.5% increase was expected. The 0.7% growth in the first quarter was also upwardly revised to 0.8% Q/Q. These unexpected growth numbers pushed EUR/SEK to the 10.23 area, a decrease of 0.7%.
A Sky News poll has indicated that two-thirds of UK voters think the government will end up with a bad deal when the UK leaves the EU and half wants a new referendum to choose between leaving with a deal, leaving without a deal or staying in the EU. When already asked the question, 48% would prefer to stay in the EU.
