- The positive equity sentiment in Asia failed to translate into sustained gains in Europe. After a limited upturn, equities turned south with losses amounting to well over 1%. American shares also opened slightly lower with especially NASDAQ taking the punches (-0.75%).
- Yields on sovereign bonds rose amid growing expectations that policymakers on both sides of the Atlantic will begin to ease off on stimulus measures more quickly than some market participants had expected
- German inflation unexpectedly accelerated to 0.2% M/M in June while the consensus expected a stabilisation. The Y/Y rise was 1.5% compared to the 1.3% consensus. The key boost came from services inflation which jumped to 1.7% (1.2% in May). The timing of a holiday played also a role. Spanish inflation dropped to a 7-month low of 1.6% Y/Y.
- The EC measure for euro-area economic confidence jumped to the highest level in a decade. The index of business and consumer sentiment rose to 111.1 in June from 109.2 in May and compared to a consensus of 109.5. Gauges for Germany, France and the Netherlands rose strongly while Spain was up slightly and Italy remained unchanged.
- UK consumer credit continued to grow strongly in May, underlining why BoE officials took action this week to protect banks against a debt bubble. Net consumer credit rose by £1.7 bn, above the £1.5bn in April and consensus of £1.4bn. New mortgage approvals and the amount of housing lending were also higher than expected.
- The US economy grew at a swifter pace in the Q1 than first thought, according to a third GDP-reading of 1.4% annualised qoq. Although this reading is still down from the 2.1% in the Q4 of 2016, it is a step up from the first estimate of 0.7%, and the second of 1.2%. The correction came thanks to the upward revised personal consumption.
- German chancellor Merkel threw down the gauntlet to US president Trump and pledged to fight at next week’s G20 summit in Hamburg for free trade, international cooperation and the Paris climate change accord. She also stuck to her recent approach of downplaying the importance of Brexit for the rest of the EU.
- US Initial jobless claims inched up 2k to 244k last week, which followed a slight upward revision to the previous week of 242k (initially reported as 241k). The increase was larger than the consensus expectation of 240k. Despite the rise, the level of jobless claims is still very low.
Rates
The genie is out of the bottle: Yields extend up-leg
Core bonds can’t find their composure after several central banks amongst others the ECB and BoE suggested in recent days that the era of the unlimited liquidity providing is running to an end. The repositioning in various markets on this CB expectation isn’t finished and overwhelms the traditional strong run of bonds at quarter end. The Bund opened weak and resumed its descent in the afternoon. Technically, the Bund took out an uptrendline at 162.86 and the 50% retracement from 158/89 to 165.93, which attracted technically-oriented seller. Major support comes closer at 161.68 (neckline double top). European equities weakened hand in hand with the Bund and the rise of EUR/USD. The typical inverse relationship between weakness in European equities and strength in Bunds is clearly a thing of the past. The causation might be going from the Bund (and euro) to equities, at least for now. An additional factor that weighted on bonds was an upward surprise in German inflation, which should be reflected in a higher EMU inflation figure tomorrow. It gives the ECB more incentive to be leaning towards starting tapering in a few months’ time, especially as the economic confidence, released today, improved sharply further.
In a daily perspective, the German yield curve steepened with yields between 0.8 bps (2-yr) and 6.9 bps (10-yr) higher. The US yield curve steepened with yield changes ranging between +1.2 bps (2-yr) and +4.9 bps (30-yr). Worth watching, the German 10-yr yield rose 20 bps in past three sessions and nears key resistance at 0.50%. On intra-EMU bond markets, yield spreads versus Germany were marginally lower with an outperformance of Greece (13 bps). Higher core yields haven’t impacted peripheral bonds yet.
Currencies
EUR/USD rally slows. USD/JPY gains on higher core yields
Today, the impact of Tuesday’s Draghi comments on the euro eased even as volatility in (some) other markets remained higher than was the case of late. EUR/USD set a minor new high this morning but returned to the 1.14 area even as EMU data were strong. USD/JPY gained further on higher core yields and ignored a loss of momentum on (European) equity markets. A decline of the yen in a risk-off environment: How far will this trade go?
Overnight, Asian equities went higher in the slipstream of WS. The dollar remained on the defensive. EUR/USD touched a new correction top north of 1.14. USD/JPY still didn’t profit from the broad equity rebound. The pair stabilized in the 112.25 area.
European markets initially didn’t know which card to play. European equities opened in positive territory, but the gains evaporated almost immediately. The strong euro weighed. EUR/USD gained further ground as the first German regional inflation data came stronger than expected. EUR/USD set a minor new correction top in the 1.1435 area. Interest rate differentials were an insignificant factor (2 year spreads US/Germany were little changed, 10-y spreads narrowed, but only slightly). Finally, the post-Draghi rally ran into resistance. The EC confidence data were also very strong, but caused no further euro gains. Some modest profit taking kicked in.
Remarkably, after a rather poor performance of late, USD/JPY trended further north despite a poor equity performance in Europe. Wider LT US/Japan spreads outweighed the risk-off sentiment. It has been quite some time since we last saw this kind of ‘interest rate driven’ yen weakness.
The US eco data (claims and final GDP) brought no big news. Equity sentiment deteriorated further. However, there was no straight forward impact on the dollar. EUR/USD hovers in the 1.14 area. USD/JPY (112.9 0) is holding (very) strong despite a tentative risk-off sentiment.
No post Carney follow-through gains for sterling
Yesterday, EUR/GBP trading was spooked by sharp euro swings in the wake of the Draghi comment and by BoE Carney preparing the market for a potential rate hike. Today, the EUR/GBP cross rate was an area of perfect calm. The pair was locked in a very narrow range close to the 0.88 pivot. The UK lending data (consumer credit and housing) were stronger than expected, but they were ignored. Cable tested the 1.30 area around noon. However, no sustained break occurred because the decline of the dollar eased as US traders joined the fray. GBP/USD trades currently in the 1.2970 area.
