- European stock markets gain nearly 1%, with Italy (+1.4%) outperforming following the deal to save two regional banks. US stock markets open with gains of about 0.5%, the Nasdaq again slightly outperforming.
- Theresa May has struck a "confidence and supply" deal with the Democratic Unionist party, which should ensure the Conservatives to have a majority on key parliamentary votes in exchange for extra funding for Northern Ireland. The government has committed an extra £1bn in funding to the province.
- New orders for key US-made capital goods unexpectedly fell in May and shipments also declined, suggesting a loss of momentum in the manufacturing sector halfway through the second quarter. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% (vs +0.4% M/M expected).
- German business sentiment hit a record high in June, with the Ifo business climate index rising to 115.1 from 114.6. Consensus was for 114.5. The gauge of current economic conditions improved to 124.1 from a revised 123.3, and the expectations measure rose to 106.8 from 106.5.
- US banking regulators have room to ease some of the sweeping restrictions put in place after the financial crisis of 2007-2009, but the core rules for the biggest firms need to stay, Federal Reserve Governor Powell said. He didn’t touch on monetary policy. NY Fed governor Dudley said that easier financial conditions support Fed tightening.
Rates
Bull flattening German/US yield curves
Global core bond markets gained some ground in the first session of the fresh trading week. The upleg in the German Bund and US Note future wasn’t sync though. The Bund shot higher around European noon without real driver. End-of-month/end-of-quarter extension buying was perhaps already at play. Earlier on the day, investors ignored the strongest German Ifo-reading on record. The upleg of the US Note future was clearly attributable to disappointing May durable goods orders. A significant gauge for business investment in US GDP declined by 0.2% on a monthly basis (vs. +0.4% M/M expected). Equity strength, upcoming supply and slightly higher oil prices failed to exercise negative pressure on core bonds. The US Treasury starts its end-of-month refinancing operation tonight with a $26B 2-yr Note auction. Currently, the WI trades around 1.35%.
At the time of writing, the US yield curve bull flattens with yields 0.4 bps (2-yr) to 2.6 bps (30-yr) lower. The German yield curve shifts in similar fashion with yields 0.1 bp (2-yr) to 2.3 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps (Italy) and +1 bp. Italian assets welcome the government’s plans to bail-out two regional lenders positively. The government provided €5B up-front, but costs could rise up to €17B via €12B guarantees. Greek bonds hardly profit from Moody’s rating upgrade (to Caa2). Moody’s tilted the rating one notch higher after the €8.5B aid tranche deal reached with European creditors.
Currencies
Intraday USD rebound undone by poor US orders data
The swings in the dollar were a bit wilder than at the end of last week. This morning, the US currency profited from positive risk sentiment and favourable development of interest rate differentials. However, the dollar faced an intraday setback as the US durable orders disappointed again. USD/JPY trades in the 111.40 area. EUR./USD changes hands just north of 1.12. Despite some intraday volatility, the established ranges remain perfectly intact.
Asian equities traded with moderate gains this morning as the Tech rally continued. A gradual rebound of the oil price was also slightly supportive. The direct impact of equities on USD trading was again small. USD/JPY opened soft, but reversed the initial dip and returned to the 111.30 area. EUR/USD traded little changed in the 1.1190 area.
European equities took a strong start to the new trading week and remained well bid throughout the morning session. The deal in the Italian banking sector maybe explains the move. The risk-on rally supported a gradual intraday rebound of USD/JPY. The pair rebounded to the 111.70 area. However, a test of the 111.79/112.13 resistance didn’t occur. EUR/USD initially didn’t show a clear trend, but finally dropped below the 1.12 mark as interest rate differentials between the US and Germany widened (temporary). The pair touched an intraday low in the 1.1172 area at the onset of the USD trading session.
US eco data again changed fortunes for the dollar. US durable orders (-1.1% M/M) and the Chicago Fed national activity index both missed consensus. USD/JPY reversed this morning’s gains as interest rate support for the dollar narrowed again. The pair trades currently around 111.40. The dollar also declined against the euro. EUR/USD rebounded north of 1.12 and trades currently at 1.1210. In the end, today’s USD swings were again modest. Even so, the dollar clearly remains vulnerable to negative news from the US even as the Fed indicates that it wants to continue policy normalisation.
UK government deal no big help for sterling
At least one part of the political puzzle in the UK was solved today. The conservative party reached a deal with the DUP of Northern Ireland to support the minority government of PM May. The deal applies for the life of the current parliament (till 2022).Amongst others, it contains £1bln extra funding for northern Ireland. The deal was announced around noon CET. Sterling (re)gained a few ticks after the announcement, but in the end the reaction was very muted. EUR/GBP dropped temporary to the 0.8775 area. Earlier today, the BBA loans for Home purchases were reported at 40 347, close to expectations. Early in US dealings, EUR/USD outperformed cable after the publication of disappointing US data. EUR/GBP trades again in the 0.88 area. Cable trades at 1.2740, also little changed in a daily perspective.
