- US stocks slipped somewhat in the opening, but European equities encountered more substantial losses today (between 0.3% and 1%). The dollar lost some minor ground against the euro and was more or less stable against the Yen. Oil failed to rebound and hovers near the sell-off lows around $45/barrel.
- The ECB is pushing for a change to the EU-law as it seeks "clear legal competence in the area of central clearing" of euro-denominated financial contracts, giving it more control over non-EU clearinghouses, also in the UK after brexit, that are deemed systemically important to the bloc’s financial markets.
- EC president Tusk said that the UK’s offer on citizen’s rights was below expectations. "If we compare the current level of citizens’ rights to what we have heard from the British prime minister, it’s obvious that this is about reducing the citizens’ rights –I mean the EU citizens in the U.K.".
- According to a poll, British households are not expecting a major upsurge in inflation over the next 12 months, despite growing rancour within the ranks of the Bank of England over rising prices.
- Unidentified sources close to the matter point out that the growing scarcity of German government bonds makes any major extension of the ECB’s asset buying scheme difficult and this will be a key consideration when policymakers decide whether to extend the buys.
- During a joint summit press conference, Macron and Merkel said to be fully committed to a free market economy IF it respects multilateral rules. By September, the two will also present plans to expand their cooperation.
- Eurozone PMI data were mixed today with services surprising to the downside and manufacturing to the upside. General levels stay high however. Combined with the strong consumer confidence figures yesterday, Eurozone economic growth in the second quarter promises to be strong. Price components of the PMI’s disappointed.
- French Q1 growth was upgraded again to 0.5% from 0.4% in the second reading and 0.3% in the first. Consumption remained flat over the quarter, but businesses ramped up their investments, with grossed fixed capital formation increasing by 1.2 %. Meanwhile, the PMI surveys indicated French job creation hit near decade highs in June.
Rates
PMI’s can’t influence bond trading
Global core bond markets ended the week in the same vein as the previous 4 trading sessions: with a range-bound, technically-inspired, neutral trading session. In contrast with previous days, the eco calendar was interesting with the release of EMU PMI’s. The composite declined more than forecast in June, driven by a disappointing services PMI. The PMI remained at an elevated level from an absolute point of view though and suggests EMU growth to accelerate in Q2 to 0.7% Q/Q. Price components fell to the lowest level in 5 months and confirm the ECB’s reluctance in normalising monetary policy. Markets didn’t react on the release and seem to be counting down to the Summer holidays. Brent crude made a second miserable attempt to correct higher, but remains near the sell-off lows. European equity market got off in a swoon around European noon, but didn’t trigger safe haven flows. Sources indicated that scarcity of German government bonds is a key consideration for the ECB when deciding on extending its QE-programme. This scarcity limits the possibility of a major extension. Markets didn’t react today, but if this idea gains traction it could trigger repositioning higher especially in the German bond market.
At the time of writing, changes on the German yield curve range between +0.3 bps (5-yr) and +1.8 bps (30-yr). The US yield curve shifts up to 1.6 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany were close to unchanged with Portugal (-3 bps) and Greece (-9 bps) outperforming.
Currencies
FX markets close the week in peace
Dollar cross rates didn’t show much spirit either today. Traders are already looking forward to next week’s more interesting eco calendar with a Yellen speech (Tuesday) and crucial inflation data on both sides of the Atlantic on Friday (US PCE and EMU CPI). USD/JPY kept a perfect tight sideways trading range near 111.30 in the final session of the week, while EUR/USD moved slightly higher, from around 1.1150 to 1.1180. The short term (2y) rate differential moved slightly in favour of the euro this week, explaining the small gains in an uneventful week. The US/German 2-yr yield spread narrowed from 200 bps on Monday to 196 bps today. The above mentioned Reuters rumours could, if reinforced eventually underpin the single currency, but for now it’s still a long shot.
Sterling initially profited from BoE Forbes’ farewell speech last night. The resigning policy maker tried to boost the hawkish’ wing in the central bank’s momentum one final time. The recent sequence of events (BoE meeting – Carney comments – Haldane speech) triggered a significant rethinking in rate hike expectation. The probability of a 25 bps hike by the BoE this year rose from 6.5% on June 14 to 50% today. Sterling still has difficulties to gain decent ground though as official Brexit-talks started on a bad note. EU Tusk said that PM May’s opening offer on EU nations is below expectations. He added that Brexit took up only very little time at today’s EU Summit. Sterling’s fortunes changed throughout the day with EUR/GBP returning to opening levels around 0.8790.
