Markets
Trump’s unexpected announcement yesterday to hit the remaining Chinese imports (worth $300 bn) with a 10% levy reverberated through Asian and European dealings this morning. Equities slip, US yields declined a further 5 to 6 bps after an already steep drop (12-14 bps) yesterday. German yields opened some 3-5 bps lower and slid further intraday with the 30-yr yield briefly turning negative for the first time ever. The bonds’ uptrend stalled around noon and reversed as attention turned to solid expected US payrolls. The July report (164 000 new jobs, 0.3% MoM/3.2% YoY wage growth) came close to consensus, although the very strong June figure got a 30 000 downward revision. All in all, it did little to change the markets’ soft expectations of the Fed going forward, thus limiting the impact on bonds. The US yield curve eventually hasn’t changed a lot after yesterday’s trip south with yields only declining at the very long end (-2 bps in the 30-yr). Germany’s yield curve bull flattens with yields unchanged (2-yr) over -3.2 bps (10-yr) to -7 bps (30-yr). Peripheral spreads narrow slightly (Spain -1 bp, Italy -3 bps), except for Greece (+3 bps).
Yesterday, EUR/USD rebounded on a weaker than expected US manufacturing PMI and on US president Trump escalating the trade war with additional tariffs on Chinese imports. Both factors were seen as raising the chances for additional Fed easing in the near future, reducing interest rate support for the dollar. Evidently USD/JPY was hit the hardest. However, at least for now, the dollar negatives also apparently outweighed the potential negative fall-out from the trade tensions on the EMU and thus on the euro. EUR/USD reversed the post-Fed decline and settled again near the 1.11 level during the European morning session today. European equities further adjusted to the negative headline news, but the spillovers to FX (and the core bond yields) were remarkably limited. Even EUR/JPY and USD/JPY finally found some rest after recent steep decline. The US payrolls report was very close to expectations with job growth at 164K. Wage growth was even slightly higher than expected at 0.3% M/M and 3.2% Y/Y. The dollar only gained a few ticks. Maybe markets already to some extent considered the report as a bit old news in the wake of the flaring up of the trade war. USD/JPY is trading near the 107 pivot. EUR/USD is changing hands in the 1.1090 area.
There was little ‘really new’ news on Brexit today. BoE governor Carney again highlighted the potentially extreme negative consequences of Brexit for several important UK industries. He also acknowledged that a no deal Brexit was now a ‘significant possibility’. However, the headlines had little impact on sterling. As was the case for several other major FX cross rates, sterling enjoyed a rather calm trading session today. EUR/GBP hovered in the mid 0.91 area. Cable traded in the lower half of 1.21.
News Headlines
China vowed to retaliate if the US goes ahead with its planned 10% tariffs on the remaining Chinese imports, its commerce ministry said. It referred to “qualitative” measures as it is unable to match the amount the US is targeting. China’s foreign ministry also warned that the move could thwart the second round of talks scheduled next month.
Fed’s Rosengren casted a dissenting vote during the Fed policy meeting last Wednesday. He sees no “clear and compelling case” for additional monetary stimulus, Rosengren clarified today. He pointed at a 50-year low unemployment, inflation that is likely to rise to the 2% target and elevated financial stability concerns given near-record equity prices and corporate debt.
