Markets
Bond trading was quite volatile today. Core bonds initially profited from volatile Chinese markets. The German Bund outperformed US Treasury, benefitting from a classic risk hedge. Markets stumbled on what was called a key Italian budget meeting. However, the BTP sell off in favour of the Bund proved rather premature as markets realized the Italian budget plan isn’t due until September. In the afternoon, the picture was more diffuse. Bonds lost further ground after the Chinese central bank stepped in to counter bearish bets on the country’s currency. The PBOC’s move prompted a sudden risk-on mood only to reverse again after China said it is ready to impose new tariffs on US imports should the US follow through with its latest trade threats. US payrolls were close to expectations and triggered no significant market reaction. At the time of writing the US and German yield curve bear flatten with yield changes varying from 1-2 bps (2-y) to 2-3 bps (10-y). Except for Italy (+5bps), intra-EMU spreads were close to stable.
The dollar initially maintained the benefit of the doubt attracting safe haven flows as Chinese markets traded volatile going into the weekend. The picture in Europe was mixed. Equities performed rather well. At the same time, Italy spreads widened, putting additional pressure on the euro. EUR/USD dropped to the 1.1565 area. The dollar returned intraday gains going into the payrolls. Global sentiment improved, at least temporarily, as China raised the RRR on FX forwards, an indication that it wants to limit CNY speculation. The US payrolls were very close to expectations. The report again failed to give any clear guidance for USD trading. Just before the publication of the payrolls, China said it plans tariffs on $60bln of US imports in case the US would implement trade threats. The announcement hindered the improvement in global risk sentiment, but had only limited impact on USD trading. USD/JPY ceded some ground after the announcement. The pair dropped below 111.50. EUR/USD trades currently in the 1.1575 area.
The scenario for sterling trading was little changed from previous days. EUR/GBP hovered in a tight range near the 0.89 big figure. Cable followed the intraday swings of the dollar. The UK services PMI declined from 55.1 to 53.6 (54.7 was expected). The report suggests UK growth momentum might ease going into the key phase of the Brexit process. Even so, the reaction of sterling was limited. EUR/GBP gained a few ticks, but the move had no strong legs, amongst others, as the euro was also in the defensive at that time. In a broader perspective, markets already knew that sterling won’t get any BOE interest rate support soon. Today’s PMI’s only confirmed this scenario. EUR/GBP is holding near 0.89. Cable hovers around the 1.30 pivot.
News Headlines
US payrolls were close to expectations. The US economy added 159k jobs in July. 193k additional jobs were expected, but May and June numbers were upwardly revised adding an extra 59k jobs. Unemployment rate declined to 3.9% from 4% in June. Strong labour market still has only a modest impact on wage growth (2.7% y/y), unchanged from June.
China’s central bank announced that financial institutions trading in some FX forwards will be subject to a reserve requirement of 20%. The Bank stepped in to halt the rally on its currency, as the yuan faced substantial losses over the previous weeks in the wake of persisting trade tensions. On the other hand, China also detailed how it plans to retaliate against new possible US tariffs. The country plans to impose $60 bln of import tariffs on US goods if the US implements recently announced plans.
Italy’s senior ministers met today to discuss next year’s budget. Deputy PM Salvini said the budget would include tax cuts and pension reform, which would likely increase Italy’s large public debt, unless it’s matched with spending cuts. Worried investors pushed the Italian 10-year yields (temporarily?) north of the 3% level today.
