Markets
Yesterday’s trading session was defined by one move around the start of dealings. Comments by US President Trump who said to have received “a call from China” took the sting out of the global risk-off rally from last Friday with US-Sino retaliatory trade measures. Chinese VP Liu He also indicated willingness to reach a deal by dialogue. The dollar, core bond yields and stock markets got some reprieve on the headlines, but, the overall enthusiasm – rightly so – remained contained. UK markets were closed for Summer banking holiday, resulting in low volume trading. Disappointing German Ifo Business Sentiment and mixed US durable goods orders failed to impact trading. US yields eventually added up to 1 bp on the day with German yield changes ranging between -0.3 bps (2-yr) and +1 bp (5-yr). 10-yr yield spread changes vs Germany ended nearly unchanged. EUR/USD eventually closed near 1.11 with USD/JPY rebounding towards 106. There was little news from UK markets with UK Parliament still in Summer recess and UK PM Johnson participating in the G7-meeting. EUR/GBP ended at 0.9085.
News flow remains thin this morning. Asian stock markets join yesterday’s WS rally. US President Trump’s tone on China shifted, but that’s not completely reflected in the Chinese version of the facts. The Chinese newspaper People’s Daily says in a commentary that the US shouldn’t misjudge China’s ability and determination to counter higher US tariffs. The paper refers to adding US companies to the unreliable entity list, issuing warning to students and travelers, halting purchases of American agricultural products or additional tariffs. They don’t manage the Chinese currency, but the yuan continues to weaken with USD/CNY now around 7.16. Tensions between the US and Iran do seem to ease with both parties open to a meeting. Core bonds and the Japanese yen gain minor ground this morning, striking a different tone than stock markets.
Today’s eco calendar is mainly interesting in the US with Richmond Fed manufacturing and especially Conference Board onsumer confidence. Consumer confidence holds up very well in the US despite signs of weakness in the manufacturing sector. Several Fed governors indicated that it’s a key gauge to watch. Consensus expects a decline from 135.7 to 129.6. A downward surprise might be seen as a sign that manufacturing weakness is spreading to the domestic economy and extend last week’s risk aversion (benefiting assets like US Treasuries and the Japanese yen). EUR/USD is still an island of calm on FX markets (balance of weakness between both). Last week’s action suggests that the bottom around 1.1050 becomes firmer.
News Headlines
The Reserve Bank of India (RBI) plans to pay out its entire $17.3 bn net income from the financial year as well as $7.4 bn in excess reserves to Modi’s government. The transaction would decrease the RBI’s recently adjusted contingent risk buffer to the low end of the 5.5% to 6.5% range (vs. 6.8% earlier). The unprecedented transfer is a fiscal windfall for Modi, who’s facing pressure to stimulate the economy, but raises questions about the RBI’s independency.
Japanese Finance Minister Taro Aso said he’s watching yen developments “with a sense of urgency” after the trade war induced surge pushed the currency below USD/JPY 105 on Monday. Aso declined to comment on any specific foreign exchange levels, but stressed the need of a stable yen for the heavy export-reliant country. Japan hasn’t intervened in the currency market since 2011.
Italy’s Five Star Movement and the Democratic Party are still in talks to form a government coalition with Giuseppe Conte possibly as prime minister, according to people familiar. The main sticking point would be the 2020 budget, Italian wire service ANSA reported. The two parties will meet again today.
