Markets
The initial risk-off reaction to the Cohen/Manafort headlines was rather quickly erased. Medium term, it raises the risk of an impeachment procedure against US President Trump, especially should Democrates retake the House and/or Senate in the November mid-term elections. Core bonds stabilized with US Treasuries slightly outperforming German Bunds. The eco calendar only contained slightly disappointing US existing home sales. FOMC Minutes as expected paved the way for a September rate hike with the Fed probably removing the notion that monetary policy is accommodative. The short term eco outlook is rosy, but most participants keep an eye on trade war risks, which could eg lead to a scaling back of investments. US yields declined by 0.4 bps (2-yr) to 1.1 bp (10-yr). The German yield curve shifted 0.9 bps (30-yr) to 2 bps (5-yr) higher. 10-yr yield spread changes vs Germany ended unchanged with Greece outperforming (-4 bps) and Italy underperforming (+6 bps). This week’s short squeeze in EUR/USD initially continued with the pair testing 1.1628 minor resistance. A break didn’t occur, with EUR/USD retracing to the 1.16 area. USD/JPY closed the session at 110.56, from a 110.31 opening. EUR/GBP tested the psychological 0.90 barrier as brexit talks between UK brexit minister Davis and EU chief negotiator Barnier continue.
Asian stock markets trade mixed overnight, in line with Wall Street yesterday evening. The S&P 500 closed flat with industrials (Dow) underperforming and the tech sector (Nasdaq) outperforming. The US Note future ekes out cautious gains, but the main trade this morning is dollar strength. EUR/USD extends yesterday’s late decline, changing hands around 1.1550. USD/JPY approaches 111 and the trade weighted dollar targets 95.50. Following Russia yesterday, US President Trump now did a veiled threat of imposing sanctions against South Africa, putting the ZAR under pressure. AUD/USD loses ground because of the political crisis which will probably end PM Turnbull’s tenure as PM.
Today’s eco calendar finally turns more interesting with EMU August PMI’s. The Juncker/Trump trade agreement was probably beneficial for sentiment event if jitters with China remain. We therefore see some upside risks to today’s PMI outcomes. Consensus expects a marginal improvement in both the manufacturing (55.2 from 55.1) and services (54.4 from 54.2) gauges. That could weigh further on the Bund and help the euro in its battle against the dollar over the key 1.1510 mark. However, Fed chair Powell probably has the final say tomorrow when he delivers a speech on the US economy and monetary policy tomorrow at Jackson Hole. EMU consumer confidence, US weekly jobless claims and US new home sales will also be published, but are of minor importance.
News Headlines
FOMC minutes of the latest Fed meeting made it clear the US economy keeps the Fed on track for higher interest rates, making it very likely for a new rate hike in September. The central bank does raise more and more concerns about their scope to battle the next recession.
Australia seems to be in need of a new Prime Minister, as current PM Malcolm Turnbull has lost support in parliament and within his Liberal party. Three of Turnbull’s key cabinet supporters stepped down this morning, paving the way for a fifth leadership contest in six years, pushing the Australian Dollar lower overnight. AUD/USD drops below 0.73.
The US and China entered a new phase in the trade war, as new 25% tariffs on $16 billion worth of goods were put in place this morning. The new tariffs brings the total of targeted goods now to $50 billion, despite the renewed trade talks between the two countries that kicked off yesterday.
