- German bunds broke through the 0.5% yield resistance level in the morning and jumped (temporarily) on the ECB minutes. Sentiment spilled over to US Treasuries yields too, be it more modestly. The nervous mood is also apparent in equity markets, with losses in European stocks running around -0.90% and spilling over into the American S&P which moves around losses of -0.50%. EUR/USD is up around 0.35%.
- The ECB minutes revealed the Council considered removing the pledge to increase the bond-buying program if needed in their last meeting. It also thought "it was necessary to avoid signals that could trigger a premature tightening of financial conditions" that might undo the progress on inflation (mission failed).
- Private US employers added 158K jobs in June, according to the ADP payroll report. The consensus expected 188K and the figure is also lower than the 230K in May. A separate report showed that initial jobless claims edged slightly higher by 4K, while markets expected it to drop.
- Trump affirmed the American commitment to Nato’s mutual defence clause and called on European nations to invest more in defence, in a hotly-anticipated speech on the transatlantic relationship in Warsaw. Trump also called Poland an exemplary ally against Russian "destabilising" behaviour.
- The EU and Japan have backed US calls for new UN sanctions on North Korea, after the country’s test of an intercontinental ballistic missile earlier this week stoked diplomatic tensions in the region.
- European and Japanese leaders confirmed that they have reached a political agreement on a free-trade deal to liberalise markets from dairy products to car parts. Japanese PM Abe states the deal "is the birth of the world’s largest, free industrialised economic zone".
- France plans to end the sale of petrol and diesel cars in the country by 2040, according to the new French environment minister’s climate plan.
Rates
Law of gravity pulls Bund through major support
In past sessions, the Bund reached the key 161.68/58 support (neckline double top/38% retracement), but couldn’t rebound sustainably. Every attempt to move away was aborted, suggesting buyers’ fatigue. Today, that was no longer the case. In a morning session devoid of key economic releases, the Bund future dropped below the key support, immediately attracting more selling. There is no obvious trigger available to explain the break. News agencies attribute it to a "weak" French (and Spanish) auction of long papers. However, we saw no sign of that in the bidding (good bids/covers) nor in the pricing. ECB Villeroy said that "ECB’s non-standard monetary stimulus will not last indefinitely" and added that "nominal interest rates, which are still particularly low today, have started to rise since autumn 2016 and are set to increase further, in line with the pace of economic recovery and inflation growth". However, these remarks were in the market well ahead of the break at 11h. We think that the Draghi’s speech last week and the BIS warning on too accommodative monetary policy fertilized the soil for today’s move. As the market goes our direction, we applaud the price action, but are fully aware that the break needs to be confirmed after tomorrow’s payrolls release and in the weekly close. Peripheral yield spreads were barely affected with Ireland, Portugal and Greece even showing some (very) modest narrowing.
US Treasuries (and gilts) followed Bunds lower. The ADP report was weaker than expected and the initial claims marginally higher than expected, but it couldn’t give US Treasuries the power to fight back. The trade deficit was in line with expectations. Just after the release of our report, the US non-manufacturing ISM will still be published.
At the time of writing, German yields increase by 1.5 (2-yr) to 8.1 bps (10-yr), the belly underperforming the wings. The key 0.50% yield resistance for the 10-year Bund was also broken and similarly, the 5-yr Bund yield confirmed the break of the -0.26% and is now closing in (helped by benchmark change) on the psycho 0% yield resistance. The US yield curve bear steepened with yields up between 0.8 bp and 5.7 bps (30-yr)
Currencies
Jump in European yields propels euro rebound
This morning, it was ‘logical’ to assume US data would drive USD trading. However, it turned out different. The German 10-year yields cleared the important 0.50% mark and interest rate differentials narrowed in favour of the euro. US data were softer than expected, but only of second tier importance. EUR/USD rebounded to the high 1.13 area. USD/JPY showed no clear trend as the rise in core yields was counterbalanced by a setback in global equities. USD/JPY hovers just north of 113.
Overnight, most Asian equity indices showed modest losses. Signs of division within the Fed, yesterday’s setback of the oil price and ongoing geopolitical uncertainty on North-Korea caused some investor caution. USD/JPY drifted back to the 113 area. EUR/USD also ceded a few ticks and traded at around the 1.1340 area going into the European open.
There were no important eco data in Europe. Still, there was an interesting move in the European bond market and this move spilled over into the currency market. The Bund future contracts dropped below an important technical support pushing the 10-year German yield north of 0.50%. US yields lagged the rise in Europe, narrowing the interest rate differential in favour of the euro. EUR/USD extended its intraday rebound in the 1.13 big figure. Interestingly, the rise in core bond yields this time hardly supported USD/JPY, probably as equities suffered too. ECB’s Praet tried to convince markets that the ECB had every reason to remain cautious but this didn’t help to soften the rise of EMU yields and the euro.
In the US, ADP job growth was reported at 158 000, missing the consensus estimate of 188 000. The May figure was also revised downward. The claims and the trade balance were marginally worse than expected. The dollar recorded some additional losses. EUR/USD filled offers just below 1.14. USD/JPY lost a few ticks but is holding north of 113. Lower equities and weaker US data are keeping each other in balance for now. A good non-manufacturing ISM might help to prevent further USD losses. More than ever, we assume that the dollar.
Euro price action dominates
There were no eco data in the UK today. So, sterling trading was driven by the overall rebound of the euro. That said the intraday gains of EUR/GBP remained rather modest. The pair trades currently in the 0.8800 area. Cable showed no clear trend today. The pair still hovers in the mid 1.29 area. One shouldn’t draw firm conclusions from today’s EUR/GBP price action. If anything, the modest rise of EUR/GBP suggests that underlying sentiment on sterling remains constructive short-term.
