Markets
Today’s trading session won’t reach the history books. Core bonds eke out small gains in low-volume action. The Bund started on a solid footing following disappointing German industrial production numbers, but rapidly returned to flipflopping near opening levels. The US Note future shows the same undecisive trading pattern. The empty eco calendar doesn’t help. Key events later this week include FOMC/ECB Minutes, Fed chair Powell’s semi-annual testimony in front of Congress and US CPI data. ECB Coeuré voiced a similar easing bias as ECB Villeroy over the weekend. The German yield curve flattens with yield changes varying between +0.3 bps (2-yr) and -1.5 bps (30-yr). The US yield curve flattens as well with yields up to 2.1 bps (30-yr) lower. 10-yr yield spreads vs Germany are nearly unchanged with Greece slightly outperforming (-4 bps) following this weekend’s parliamentary election win of the opposition New Democracy party. They campaigned on a programme of lower taxes and bigger spending to boost Greek economic growth.
The dollar extended its recent rebound last Friday as solid US payrolls questioned market speculation on aggressive Fed easing in the near future. During the weekend, US president Trump stepped up his pressure on the Fed to counterbalance easing of other major central banks in order to remove a competitive disadvantage for the US economy/companies. However, for now, the dollar hardly suffers from Trump’s attacks on Fed independence. Sentiment was risk-off in Asia, supporting the USD-bid. EUR/USD hovered in a tight range in the lower half of the 1.12 big figure in Asia and early in Europe. A shy EUR/USD up-tick was blocked by comments from ECB Coeuré. He reiterated other ECB comments of late that both further rate cuts or additional bond buying are possible if needed. However, also this move had no strong legs. EUR/USD is trading in the 1.1220/25 area. The broader USD bid is also visible in USD/JPY. The pair rebounded back to the 108.50/60 area even as risk sentiment stays fragile.
The EUR/GBP cross rate simply didn’t go anywhere today. The pair was locked in a tight range roughly between 0.8955 and 0.8975. Investors await next steps in the Brexit saga as members of the UK conservative party are voting to choose a new PM. For now, there are few indications on what tactics expected winner Boris Johnson will put in place once appointed. Sterling is holding near recent lows against the euro and dollar, with EUR/USD currently at 0.8960 and cable trading in the low 1.25 area.
News Headlines
France’s central bank manufacturing sentiment index (95) dropped to the lowest level in six years in June. The Bank of France said its set of indicators now point at an economic expansion of only 0.2% in 2019 Q2 (vs. 0.3% in May) after rising 0.3% in the first quarter.
ECB board member Coeuré reiterated that loose monetary policy is needed now “more than ever” and kept further rate cuts and QE on the table. ECB’s Villeroy in another interview said the ECB is determined to act if necessary but suggested there’s no need to rush into decisions already this month.
Merkel’s protégé Kramp-Karrenbauer said the ECB should give thoughts to curb the duration of its low interest rate policy because of the “problematic effects” for people with savings deposits, “including many in Germany”. She added that with current low yields capital is flowing out of Europe.
