Markets
Risk aversion remained yesterday’s main market theme, even if the Turkish lira managed a short term comeback after authorities cracked down on short selling the currency. Additionally, Qatar was said to be ready to invest $15bn in the country. EUR/TRY dropped from 7.4 towards 6.8. The relief didn’t spill over to other markets. Chinese stock markets lost another 2% with Tuesday’s disappointing eco numbers still echoing. The malaise spread of EMU (-1.5%) & US (-0.75%) stock markets while commodities shared some of the pain as well. Copper for example tumbled by 4.4%. The Japanese yen (USD/JPY 110.74 from 111.15) and Swiss franc (EUR/CHF new YTD low 1.1244) profited on FX markets while EUR/USD tested the 1.13 big figure, also in the wake of strong US retail sales. The pair eventually closed unchanged around 1.1345. The likes of BRL and ZAR lost more ground. Core bonds played their safe haven role. The German yield curve bull flattened with yields 0.9 bps (2-yr) to 2.4 bps (30-yr) lower. US yields declined by 2.9 bps (2-yr) to 3.7 bps (5-yr) with the curve matching the flattest level (25 bps) since 2007. Peripheral yield spread changes vs Germany widened by 4 to 6 bps with Italy significantly underperforming (+16 bps). Traded volumes on the BTP market were low though because of a regional holiday. Lega Salvini blamed the EU’s fiscal constraints for Tuesday’s deadly bridge collapse, suggesting willingness disobey EU targets in the ongoing budget review. The Italian 10-yr yield spread equals the post-election high around 290 bps.
Risk sentiment improved overnight after news that a Chinese trade delegation will go to the US for low-level trade talks end of August. It will be the first official negotiations since they broke down two months ago. Asian equity indices regained most/all opening losses. The US Note future loses ground while USD/JPY (110.88) and EUR/USD (1.1390) are upwardly oriented. We expect a weaker opening for the Bund as well. Today’s EMU eco calendar is again empty while the US one contains some second tier numbers (weekly jobless claims, Philly Fed Business outlook, housing starts and building permits). We don’t expect them to play first fiddle in today’s action. Sentiment about EM will be key. Overnight gains in the ZAR also suggest some improvement in sentiment and could support EUR/USD and USD/JPY in a daily perspective while weighing on core bonds. From a technical point of view, EUR/USD lost 1.1510 key support last week, improving the technical picture for the dollar and unlocking a new trading range between 1.1187 and 1.1510. The German 10-yr yield is near the bottom of the 0.28%-0.50% range, which we deem strong support. The US 10-yr yield hovers in the middle of its 2.8%-3% trading band.
UK inflation picked up to 2.5% Y/Y in July while core CPI stabilized at 1.9% Y/Y, both as expected. Sterling didn’t react to the news and remained in the defensive ahead of today’s restart of brexit-talks between the EU and UK. The Irish border issue features on today’s agenda and will probably prime the UK retail sales release. EUR/GBP rose from an intraday low of 0.89 yesterday to 0.8950 currently and is again drifting towards 0.9031 key resistance.
News Headlines
The Turkish banking authority has taken extra measures to keep its currency in check, such as tightening the rules for short-selling by reducing the ability of Turkish banks to supply the market with lira by half.
China’s Commerce Ministry will dispatch a delegation led by Vice Commerce Minister Wang Shouwen to the US for low-level trade talks in late August. The talks, at the invitation of the US, would be the first official exchanges since earlier negotiations two months ago broke down.
Australia’s employment declined by 3.9k in July (from a 50.9k increase in June), while an increase of 15.0k was expected. However, full time employment rose 19.3k while part time employment declined with 23.2k jobs. The unemployment rate decreased from 5.4% in June to 5.3% in July. The AUD gained some ground on the news.
