- European equities traded with a small upward bias and currently record gains of around 0.5%. The German Dax underperforms. US equity indices open marginally higher.
- ECB President Draghi is scheduled to address the Federal Reserve’s Jackson Hole conference in August for the first time in three years, according to a person familiar with the matter. In a speech he is expected to give a further sign of the ECB’s growing confidence in the eurozone economy and its reduced dependence on monetary stimulus.
- US eco data printed close to consensus. Weekly jobless claims hovered around last week’s level (247k from 250k). June headline PPI slowed from 2.4% Y/Y to 2% Y/Y (vs 1.9% Y/Y forecast) while core PPI declined from 2.1% Y/Y to 2% Y/Y.
- The European Banking Authority, the supervisor of supervisors across the EU, said that the majority of banks across the bloc expect their provisions to rise by 18% after the introduction of the rules, called IFRS 9. That compares to an earlier estimate in November that was as high as 30%.
- The rebalancing of global oil markets has become less certain, with OPEC production rising and little evidence that bloated stockpiles are shrinking as expected, the International Energy Agency said. That’s a change from two months ago when the IEA said the "rebalancing is here" and was accelerating in the short term.
- The German economy will continue to enjoy solid growth in the second quarter, driven by soaring private consumption and higher construction activity while net foreign trade is unlikely to add to the expansion, the Economy Ministry said. Europe’s biggest economy grew by 0.6% Q/Q in the first quarter
- The Swedish krona jumped to its strongest level in more than two months (EUR/SEK 9.5250) after new inflation figures beat forecasts for a second straight month, lending further support to the central bank’s recent moves to edge away from monetary stimulus.
Rates
Draghi rumoured to give key speech at Jackson Hole
This week’s rebound on global core bond markets initially persisted. Amid an empty eco calendar, investors wondered about yesterday’s testimony by Fed chair Yellen before US Congress. Her subtle shift on inflation stressed the potential importance for markets from tomorrow’s US CPI (and retail sales) data. Around European noon, core bond markets made a U-turn after the WSJ reported that ECB-president Draghi will address the Fed’s Jackson Hole meeting at the end of August. According to officials, he is expected to signal that the ECB will announce at its September 7 meeting that they intend to gradually wind down QE-purchases next year. His appearance would be of symbolic value. His last speech in Jackson Hole dates back to August 2014 and was widely seen as heralding the start of asset purchases. The ECB confirmed Draghi’s attendance some hours after the rumours.
At the time of writing, German yields rise 0.5 bps (2-yr) to 1.4 bps (10-yr). Changes on the US yield curve vary between +1.2 bps (2-yr) and +1.9 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps (France) and +2 bps (Portugal).
The Italian debt agency tapped the on the run 3-yr BTP (€2.75B 0.35% Jun2020), 7-yr BTP (€2.5B 1.85% May2024), 15-yr BTP (€1.23B 2.45% Sep2033) and off the run BTP (€0.77B 4% Feb2037). The total amount sold was the maximum of the €5.75-7.25B on offer. The auction bid cover was 1.51, which is above average for Italian auctions. The Irish treasury (NTMA) tapped two on the run bonds for a combined €0.75B: €0.5B 0.8% Mar2022 and €0.25B 2% Feb2045. The auction met with good demand, resulting in an auction bid cover of 2.27. The NTMA has issued €9.5B bonds so far this year, compared to its stated target range of €9-13B in the bond markets.. The US Treasury ends its refinancing operation tonight with a $12B 30-yr Bond auction. Currently, the WI trades around 2.90%.
Currencies
Dollar looking for guidance ‘post-Yellen’
There was no dominant story to guide FX trading today. The dollar remained in the defensive in the wake of yesterday’s Yellen testimony, but the pressure eased. Markets await tomorrow’s key US eco data. EUR/USD dropped temporary below 1.14, but trades currently again above the big figure. USD/JPY tries to sustain north of 113.
Overnight, Asian equities joined the post-Yellen rebound on WS. Strong Chinese foreign trade data (both imports and exports stronger than expected) supported Chinese and Australian markets. USD/JPY underperformed despite recent attempts by the BoJ to cap the rise in Japanese yields. The pair also didn’t profit from the risk-on sentiment. USD/JPY hovered in the low 113 area. EUR/USD traded in the 1.1440 area.
There were no important European data. Most markets were driven by particular, internal dynamics with little consistency across markets. Equities opened strong. At the same time, European yields extended yesterday’s decline. The dollar also showed a diffuse picture. USD/JPY remained in the defensive (despite a bid in equities). EUR/USD met stop-loss selling, tumbling to the 1.1371 area. Profit taking on the recent impressive EUR/JPY rally was a factor. Early afternoon, markets turned a bit more volatile on a WSJ headline that Draghi might address the Fed Jackson Hole conference. Will he use this high profile forum to announce further policy normalisation? Whatever the interpretation, the euro bottomed. EUR/USD returned north of 1.14. USD/JPY also bottomed out as did core bond yields.
The US jobless claims and producer prices were very close to expectations. The impact on the dollar was negligible. USD trading remains indecisive with EUR/USD holding in the low 1.14 area. USD/JPY rebounds north of 113.
Sterling extends technical rebound
Sterling regained further ground, extending the rebound that started after good UK labour data yesterday. We see the rebound in the first place as technical in nature. Cable continues to profit from underlying USD softness. A topside test of EUR/GBP was rejected yesterday. The broader euro correction also triggered some further profit taking on EUR/GBP longs. The UK government published the Brexit ‘Repeal Bill’. It will probably become a source of political noise, but for now we see no direct impact on sterling trading. BoE’s McCafferty further complicated the BoE’s monetary policy debate as he raised the issue of reducing the BoE’s Balance sheet. His comments might have been slightly supportive for sterling. EUR/GBP trades currently in the 0.8825area. Cable is changing hands in the 1.2950 area.
