Markets
The German Bund started off lower but managed to eke out small gains eventually. Markets err on the side of caution ahead of tomorrow’s EMU PMI’s and Thursday’s ECB meeting which yields a lot of market moving potential. The announcement of UK’s new PM (see below) had little impact as the outcome was as expected. Still, with Brexit and all of its uncertainty now back on the radar, it can be considered a marginal Bund positive too. Yields decline about 0.6 bps in the 2-yr, 5-yr and 10-yr tenor. Peripheral spreads narrow from -3 bps (Italy) to -5 bps (Greece). Portugal and Spain underperform (both +2 bps). In the UK, the Treasury department cashed in on the strong gilt rally and saw it’s 10-yr auction printing at 0.789%, the second-lowest yield on record after an auction in the wake of 2016’s Brexit vote. US yields traded a choppy pattern near opening levels before heading north on US Kudlow’s remarks. He confirmed yesterday’s reports by Chinese media and said that the US trade official’s trip to China is likely to happen. US yield changes vary from +2.3 bps (2-yr) over +1.3 bps (5-yr) to +2 bps (10-yr).
EUR/USD drifted below the 1.12 big figure in Asian trading hours. This gradual but protracted decline continued throughout the day. There was no specific driver to explain the move. The dollar remains strong overall as was already the case yesterday. Interest rate differentials are widening in favour of the US currency, but only marginally. Market pricing on the outcome of ECB meeting didn’t change much today. However, euro investors apparently don’t want to be wrong-footed in case Draghi would bring an extremely soft message or cut rates already this week. The break below the 1.1180/90 support area worsened the MT picture for the EUR/USD cross rate. The pair is currently trading in the 1.1160 area. The door is open for a retest of the key 1.11 support area. USD/JPY extends gains north of 108 as global equities show solid gains and US yields rose a few bps.
Sterling remained under pressure this morning. Some investor caution ahead of the announcement of the new conservative party leader was in play. At the same time, BoE policy maker Saunders indicated that the uncertain economic outlook due to Brexit can bring the Bank in a position not to raise rates even as the its own forecasts suggest to do so. This ‘soft’ twist of a hawkish member of the BoE validated market pricing that a BoE rate cut is unlikely anytime soon and weighed on sterling. EUR/GBP returned to the 0.90 area. However, sterling selling already dried up before the UK conservative party at noon announced that Boris Johnson will become the next UK PM. Some sterling shorters took profit causing an early (but modest) buy-the-rumour sell-the fact reaction already before the official announcement. In his speech Johnson avoided any specific indications on how he intends to solve the Brexit stalemate. He reiterated his intention to leave the EU on October 31 and also indicated action to ‘energize’ the economy (fiscal stimulus?). The CBI order and confidence data published around noon at least suggested that any help for the UK economy is highly welcome. Both CBI confidence and order data fell off a cliff. EUR/GBP is currently trading in the 0.8980 area. Cable hovers in the 1.2440 area. For now, there is no indication of substantial profit taking on sterling shorts yet. Today’s sterling repositioning is only of intraday significance at best.
News Headlines
Spanish Socialist leader Sanchez did not receive enough backing by parliament to form a government today. He now has two days to try to hammer out a coalition deal with far-left Podemos before a second vote is due. If Thursday’s vote delivers no majority either, further and final votes could be held in September before a repeat election will be held on November 10.
The IMF again lowered 2019 global growth forecasts from 3.3% in April to 3.2% and warned for policy “missteps” on trade and Brexit, which could derail a projected rebound in 2020 (to 3.5%). US growth has been revised upwardly (from 2.3% to 2.6%) while China saw its growth cut to 6.2% (-0.1% point). World trade is expected to rebound to 3.7% vs. 3.9% earlier.
