Markets
Core bonds stabilized during this morning’s European session, but faced new selling pressure as US trading gets going. US Treasuries underperform Bunds. The move is partly driven by continued equity strength and partly technically inspired (yesterday’s engulfing pattern in German yields and failed test of key support in the US). The continuation of the Treasury’s supply operation and comments by ECB Praet might have been of minor importance as well. The ECB’s chief economist, one of the founding fathers of the ECB’s extremely accommodating monetary policy, now says that risks associated to this policy need to be “closely monitored” after years of economic expansion. Early US eco data printed mixed and didn’t leave a trace on markets. The US yield curve bear steepens with yields up to 3.1 bps (30-yr) higher. The German yield curve shifts in similar fashion with yields increasing by 0.3 bps (2-yr) to 1.6 bps (30-yr). Peripheral yield spreads vs Germany narrowed up to 3 bps (Italy). There were some conflicting messages on Italy possibly breaching the 3% of GDP budget criterion with FM Tria promising to stay below it and keep the debt-to-GDP ratio on a declining path while 5SM leader Di Maio didn’t rule out a bigger deficit.
Dollar softness persisted today. Yesterday, investors sold the dollar as global risk sentiment improved. The US and Mexico reaching a new trade agreement supported investors hope that global trade tensions might ease, reducing safe haven demand for the dollar. Asian and European investors were less excited about the US/Mexican deal compared to US markets yesterday evening. Interest rate differentials between the US and Germany also widened slightly in favour of the dollar. Even so, the US currency remained in the defensive. At the same time, the euro ignored comments from Italy’s Di Maio that the country could breach the EU deficit rules. EUR/USD returned to the 1.17 area and even extended gains during the US trading session. US eco data were mixed. Inventory build-up was stronger than expected but the July trade deficit was much worse than expected (-$72.2 bln from -67.9 bln). The reaction of the dollar was negligible. Even so, in a context of lingering trade tensions, the negative US international trade data are evidently no help for the dollar. EUR/USD trades currently 1.1725 area.
Sterling traders returned from a long weekend today. There were no UK eco data. The debate on the likelihood/the potential consequences of a ‘no-deal brexit’ remained the main driver for sterling trading. Over the previous days, headlines of several parties involved in the brexit process preparing contingency plans unnerved investors and weighed on sterling. EUR/GBP yesterday surpassed the 0.9033/45 resistance. Sterling still had to fight an uphill battle today. UK PM May in an interview said that no deal is better than a bad deal and that a no-deal scenario wouldn’t be the end of the world. The comments didn’t help sterling. EUR/GBP maintained an upward bias and touched an intraday peak in the 0.9075 area. Cable avoided further losses on global USD softness. The pair trades near 1.29.
News Headlines
US trade deficit increased to a 5-month high in July (-$72.2 bn). Wholesale (0.7%) and retail Inventories (0.4%) grew strongly, which could have a positive impact on GDP. Richmond Fed’s manufacturing ‘confidence’ index increased in August to 24 from 20. Consumer confidence printed much stronger than expected at 133.4 in August (127.4 in July).
Swedish retail sales unexpectedly declined 1.0% M/M in July (+0.4% expected) bringing the Y/Y measure to -1.2%. This plunge is linked to unusually high temperatures but still raises doubts over economic momentum as the Riksbank prepares to raise interest rates later this year. EUR/SEK is testing the April peak near 10.70.
As Turkey remains in crisis, Germany is considering to provide emergency financial assistance. Fear grows that an economic meltdown could spill-over to Europe, cause further destabilization in the Middle East and unleash a new immigration wave to the bloc. French Finance Minister Le Maire already expressed similar concerns.
