- Trading in most markets remained very volatile as investors pondered the impact of yesterday’s ‘hawkish’ comments from ECB’s Draghi. Rumours that the ECB president was misinterpreted caused an temporary reversal in yields and the euro, but the jury is still out where this move will end. European equities declined early this morning but reversed part of the early losses, currently trading with losses of less than 0.5%. US equities are in better shape and regain part of yesterday’s loss in volatile trade.
- Italy’s CPI fell by 0.2 % M/M in June. Today’s preliminary reading marks a pullback from the revised 0.1% decline in May. On the year, prices rose by 1.2%, down from the 1.6% rise in May. Food and energy were the main reasons for the decline.
- Macron’s cabinet will approve a broad outline of changes to the labour code and asks parliament for the authority to negotiate the details over the summer with unions and business groups. The government plans to introduce the new code in September by decree, to avoid getting tangled up in a long parliamentary debate.
- The UK’s housing market regained some momentum in June, according to Nationwide’s latest house price survey. This uptick was not enough to stop quarterly price growth slowing markedly. Average prices in Q2 were 2.8% higher than the same period last year, compared to 4.1% growth in Q1. London and the south-east suffered most.
- Britain’s markets’ watchdog announced radical changes to the country’s asset management industry, seeking to improve transparency and value for money for customers. The proposed change is met with resistance from the industry, which is already under pressure because of Brexit and cheaper index-tracking funds stealing market share.
Rates
Draghi’s comments contested
Mr. Draghi’s comments yesterday continued to dominated markets and media, resulting in a volatile sideways oriented morning session. The Bund set a new low at 162.78, but traded sideways afterwards. The Bund spiked higher in the afternoon after sources stated that markets had misinterpreted Draghi’s remarks yesterday. Investors didn’t buy into the move after which return action occurred. Comments by BoE governor Carney, who said that the BoE may need to remove stimulus as slack erodes, helped reversing the core bond gains. A similar, but opposite, move occurred in EUR/USD.
The ECB might have been flabbergasted by yesterday’s sharp reaction to Mario Draghi’s comments, as it runs against the suggested prudent gradual turn. If the euro and yields surge significantly higher while equities fall, it tightens financial conditions even without any ECB action and makes the central bank’s turn superfluous. We think Mario Draghi prepared a cautious turn in policy and the ECB now tries to control the sharp market reaction.
In a daily perspective, German yields fell between 0.5 (10-yr) and 2.5 (2-yr) bps, erasing a small part of yesterday’s increase. The US yield curve steepened with yield changes ranging between -1.2 bps (2-yr) and +2.1 bps (30-yr). On the intra-EMU bond markets, yield spreads versus Germany narrow up to 2 bps with Spain (-6 bps) and Portugal (-7 bps) outperforming. The narrowing occurred mainly between the Bloomberg article was published.
The second tier data releases didn’t impact trading in a lasting way, but nicely describe the current economic situation. On the activity side, French consumer confidence boomed, while M3 lending data confirmed a steady recovery of lending activity. On the other hand, Italian inflation (June) and German import prices (May) were down on the month, declined on a yearly basis and printed below expectations. The US trade deficit was near expectations and inventories above consensus.
Currencies
Draghi comments continue to spook EUR/USD
Yesterday’s Draghi comments remained the dominant factor for EUR/USD trading. The pair extended yesterday’s rally this morning, moving to the high 1.13 area. Market comments/rumours that the ECB-president was misinterpreted caused an intraday setback causing EUR/USD to trade in the 1.1360 area again. USD/JPY hovers around 112 on conflicting influences.
This morning, Asian equities traded with modest losses as the US Tech sell-off weighed. At the same time, yields remained under upward pressure. The oil rebound struggled. EUR/USD held near the rally highs in the mid 1.13 area. USD/JPY tried to sustain north of 112, but the momentum eased as correction of equities tended to support the yen.
There were few EMU eco-data with market-moving potential. FX traders continued to adapt positions to yesterday’s developments (Draghi comments, delay US healthcare vote, Yellen comments…). Initially, European markets followed yesterday’s trends in the US. European equities corrected further south, but the euro extended its Draghi-induced rebound. European yields held close to the recent highs, but the interest rate differentials between the dollar and the euro didn’t narrow anymore. Still, EUR/USD touched a new correction top in the 1.1388 area. USD/JPY initially traded in the 112.40 area but gradually ceded ground as equity sentiment weighed.
At the onset of the US session, markets were wrong-footed by comments indicating that the ECB considered the market having misjudged yesterday’s Draghi comments. The rumours triggered a sharp setback. European yields and the euro tumbled. EUR/USD filled bids below the 1.13 mark. Equities rebounded, reversing most of the intraday losses. EUR/USD staged a cautious rebound this afternoon, but the move accelerated as BoE’s Carney also indicated that some removal of policy stimulation might be warranted. EUR/USD trades currently in the 1.1350/60 area in volatile trade.
USD/JPY showed no clear reaction as the intraday rebound in equities and the decline in core yields kept each other in balance. USD/JPY trades currently in the low 112.20 area. We are a bit surprised by the sharp reaction of the euro on what is currently nothing more than ‘rumours’. We keep monitoring the speeches from the ECB in Portugal.
Sterling jumps on Carney U-turn
It was a calm session for GBP trading…. for most of the day. Cable held a sideways range in the lower half of the 1.28 big figure. BoE’s Cunliffe indicated that the BoE had time to consider whether a rate hike is appropriated. His comments confirm the rift within the BoE, but the market reaction was limited. The price moves in EUR/GBP were in the first place driven by the swings in the euro in the wake of yesterday’s Draghi comments. EUR/GBP traded in the 0.8870/80 area early this morning, but gradually lost a few ticks as sentiment on risk turned less negative. Early afternoon, the pair tumbled to the low 0.88 on the rumours that Draghi was misinterpreted by markets.
At the time of writing a new plot for sterling trading is popping up as BoE’s Carney indicated that some tightening might be warranted if the growth/inflation trade-off lessens. Quite a big U-turn from recent comments of the BoE governor. Sterling is jumping sharply higher. Cable is currently trading north of 1.29 and EUR/GBP has returned below the 0.88 handle.
