Markets
Global core bonds lost ground today in a low volume trading session with UK markets closed for Summer Bank Holiday. The German Bund underperformed the US Note future following stronger-than-expected German IFO business sentiment which confirmed developments in last week’s national PMI’s. The Juncker/Trump trade truce is probably at play. Positive risk sentiment on stock markets and tonight’s start of the US end-of-month refinancing operation weighed on the market, too. Both the US S&P 500 and Nasdaq opened at new all-time highs. The German yield curve bear steepens with yields 0.8 bps (2-yr) to 2.3 bps (30-yr) higher. The German 10-yr yield shows a potential engulfing pattern, signaling more upward potential within the 0.3%-0.5% trading range. The US yield curve shifts in similar fashion with yields increasing by 1.3 bps (2-yr) to 2.2 bps (30-yr). Peripheral 10-yr yield spreads narrow up to 3 bps.
On Friday, the dollar ceded ground as Fed’s Powell indicated that the Fed can maintain its gradual approach on its road to policy normalization. Today, the US currency mostly consolidated Friday’s loss. The PBOC conforming recent indications that it didn’t intend any further weakening of the yuan was a potential USD negative. However, this trend wasn’t confirmed early in European trading. EUR/USD even dropped temporarily below 1.16, but the euro found a floor after a stronger than expected German IFO business confidence. Interest rates also move slightly in favour of the single currency. US eco data were second tier and had no noticeable impact on USD trading. EUR/USD is changing hands in the 1.1635, little changed from Friday’s close. USD/JPY struggles not to fall back below the 111 area. USD trading remains in holiday modus, awaiting more significant news. If anything, USD softness prevails.
Today, sterling trading developed in thin market conditions as UK markets were closed for the Summer bank Holiday. EUR/GBP drifted basically sideways in the mid 0.90 area as the pair rebounded to the 0.9033 resistance area last week. Lingering press headlines on (the consequences of) a no-deal brexit are keeping sterling in the defensive. All parties involved reiterate they want to avoid such a scenario. At the same time, the debate on all kinds of contingency plans suggests that the ‘unthinkable’ might be less unrealistic than all parties assumed at the start of the Brexit process. EUR/GBP trades in the 0.9040 area. Cable is changing hands in the 1.2875 area, partly due to some post-Jackson Hole USD softness.
News Headlines
French Finance Minister Le Maire said that France’s 2018 public sector budget deficit is expected to be larger than previously thought. It might reach 2.6% of GDP, while a 2.3% deficit was expected. The government’s decision to take over debt from the SNCF is the main reason for the upward revision.
German business confidence for August came in strong today ,with the ‘IFO expectations index’ rising for the first time in nine months. The index for August increased from 98.2 in July to 101.2 this month. The rise in confidence came after the Trump-Juncker agreement that eased trade tensions between the EU and US.
As Turkish markets were closed last week due to a public holiday, the Turkish lira slided almost 5% today against the dollar. The ongoing concerns about President Erdogan’s power concentration and the political deadlock between the US and Turkey is still pushing the Lira down, with USD/TRY currently trading at 6.125.
The US sanctions on Russia, that were announced last month after a nerve attack in the UK, come into effect today. A second round of penalties will be imposed in 90 days unless Russia assures it would no longer use chemical weapons. The Kremlin said it needed time to assess the impact, but confirmed it will react in line.
