Markets:
The (reversed) trends that started on global markets yesterday continued today. Equities extended gains and yesterday’s cautious rise in global/core yields accelerated. EUR/USD also profited from improved sentiment. Today’s continuation of the risk rebound was mainly triggered by headlines that US and China will hold preparatory talks on trade this month, which will (hopefully) result in high-level negotiations next month. Optimism on (European) markets was temporarily disrupted by poor German July factory orders (-2.7% M/M and -5.6% Y/Y). However, optimism/hope on a de-escalation in the trade conflict and, to a lesser extent, receding risk of a hard Brexit, soon caused investor optimism to prevail. Recent comments from (ECB) policy makers maybe also fueled investors doubts whether the bank will deliver on expectations for aggressive monetary easing next week. Early in US dealings, ADP reported strong private US job growth at 195 000 (149 000 expected). As usual the market reaction to the report was guarded, but it allowed the reflation trade to continue. US jobless claims were solid (low) too. At the time of writing, the US yield curve rise between 7.3 (5-y) and 5 bps (30-y). The European yield curve bear steepens, with again very heavy losses for the very long end of the curve. German yields are rising between 1.5bp (2yr) and 10.5 bp! (30-y). The rise in core yields also halted the aggressive narrowing in Italian yield spreads. The Italian-German yield spread widens marginally (3bp). Greece still slightly outperforms (-6bp). Other changes were limited with no clear trend. Markets now look out whether the US non-manufacturing ISM will be able to confirm today’s market optimism.
On the currency market, the euro and sterling outperformed. There rise of EUR/USD was mainly follow-through price action on yesterday’s rebound. Poor German order data caused only a temporarily pause in the rebound. On the other hand, the dollar hardly profited from a strong ADP labour report, solid jobless claims and a substantial rise in ST US yields. EUR/USD returned to the 1.1070/75 area. USD/JPY profits from higher core yields and a global risk-on sentiment (currently 106.90 area). The US (non-manuf) ISM later today and the US payrolls tomorrow are the next points of reference for dollar. The jury is still out, but question is how far this EUR/USD repositioning will go if data indicate that the slowdown in manufacturing has, for now, only a modest impact on the domestic economy and on employment.
The rebound of sterling also continued as Boris Johnson lost its battle to keep the option of a no deal Brexit open. (FX) markets currently see Brexit almost certainly being delayed. Boris Johnsons sticks to his call for early elections, but will probably only get it when the bill to exclude a no-deal Brexit is formally approved. EUR/GBP is changing hands in the 0.8875 area. Cable rebounded further, regaining the 1.23 big figure.
News Headlines:
The Swedish central bank kept its policy rate unchanged at -0.25%, but unexpectedly holds to its plan to push through with a second rate hike this cycle around the turn of the year. Inflation is close to the 2% target and the central bank expects the Swedish economy to avoid a deep slowdown. The Riksbank admits that the pace of rate hikes afterwards could be slower than envisaged before. EUR/SEK fell from 10.76 to 10.66.
The European Securities and Markets Authority (ESMA) published a framework that supervisors can use to test the resilience of funds to shocks. Pockets of vulnerabilities are identified, especially for high yield bond funds. Under the new framework’s “severe” assumptions, up to 40% of high yield bond funds tested could end up with too little liquid assets to meet redemptions.
