- European shares advanced strongly (Euro Stoxx +1.0%), rebounding after three days of declines as rising bond yields spurred banks and increasing metal prices helped miners. US stocks climbed on strong corporate earnings from big companies such as Caterpillar, du Pont de Nemours, United Technologies and General Motors.
- German Ifo business climate improved for a sixth month in July. The Ifo index rose to 116.0 from a revised 115.2 in June. That’s the highest level since 1991 and compares with a median estimate of a drop to 114.9. The Ifo expectations component also rose from 106.8 to 107.3 while a decline to 106.5 figure was expected.
- American house prices nation-wide cooled modestly from an upwardly revised 5.65% Y/Y in April to 5.58% in May according to the S&P Home Price Index. The S&P 20-City index, that measures home-price changes in 20 US metropolitan regions, also declined from 5.77% Y/Y in April to 5.69% in May while the consensus expected 5.80%.
- Greece will raise €3 billion in its first visit to international bond markets since 2014 as it attempts to turn the page on a debt crisis that forced it to seek multiple international bailouts. The sub-investment grade rated country is selling 5y notes at a yield of 4.625%, after tightening terms twice from an initial target of around 4.875%.
- The two new members of the Bank of Japan’s policy board said that the central bank should continue efforts to achieve its 2% price goal and it was premature to debate an exit from the massive monetary stimulus. The first policy meeting for the newcomers will be in September.
- Senator John McCain, who is battling brain cancer, will return to the US Senate today to play what could be a crucial role in salvaging Republican efforts to repeal Obamacare. The tally in the divided chamber was expected to be extremely tight, making McCain’s return critical to the repeal effort.
- US Consumer confidence and Richmond Fed Manufacturing index surprised both on the upside of expectations. Consumer confidence surged from 117.3 to 121.1 in July, with an improvement both in the current assessment and expectations components. The Richmond Fed index improved from 11 to 14 in July.
Rates
Core bonds sell-off
Global core bonds lost ground today. The move started at the European opening and accelerated ahead of the start of US dealings. It’s hard to pinpoint one specific factor to explain the move. A very strong German IFO-indicator (both current situation and expectations) and an upwardly oriented oil price certainly helped. Several bellwether companies including Caterpillar, announced good earnings and boosted equity market sentiment. The German 10-yr yield’s failed test of 0.5% support perhaps inspired some technical Bund selling and suggests we might attack the 2017 high, especially if the Fed tomorrow signals willingness to continue its tightening cycle without attaching too much weight to the current dip in inflation readings. The upcoming US refinancing operation plays in the disadvantage of US Treasuries.
At the time of writing, the US yield curve bear steepens with yields 2.1 bps (2-yr) to 4.8 bps (30-yr) higher. Changes on the German yield curve range between +2.9 bps (5-yr) and +4.8 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany are nearly unchanged.
Greece launched its first benchmark bond since 2014 today. They issued a new 5-yr GGB via syndication. The order book was in excess of €7B, allowing Greece to print €3B. The bond was priced to yield 4.625%, tighter than IPT’s at 4.875% and official guidance at 4.75%. With its return to international markets, Greece aims to raise a war chest ahead of the end of the current bailout programme in August next year. The US Treasury starts its end-of-month refinancing operation tonight with a $26B 2-yr Note auction. The WI currently trades around 1.39%. The auction is followed by a $15B 2-yr FRN auction and a $34B 5-yr Note auction tomorrow and a $28B 7-yr Note auction on Thursday.
Currencies
EUR/USD nears key 1.1735 resistance
Today, EUR/USD and USD/JPY initially didn’t find a clear trend even as EMU confidence data were very strong. Early in USD dealings, European yields jumped higher again. EUR/USD came within reach of the 1.1714/35 area, but a real test didn’t occur (yet). USD/JPY had some tepid intraday gains and trades in the 111.50 area. Even so, euro weakness combined with USD softness remains the name of the game going into tomorrow’s Fed policy decision.
Asian equities traded mixed in line with WS. ECB’s Mersch said he saw upward risks to EMU growth and stated that he’s more assured about a return of inflation to the target. At the same time he reiterated that policy accommodation remains necessary. EUR/USD rebounded to the 1.1660 area on the Mersch headlines, but a test of the recent highs didn’t occur. USD/JPY stabilized near 111.
In Europe, the French Business confidence and the German IFO business climate were both stronger than expected. European equities and core yields rose slightly after the data. The euro tried a shy attempt to go higher but almost immediately ran into resistance. EUR/USD returned to the 1.1650 area. USD/JPY slightly gained further ground on a modest rise in core (US & EMU) yields.
Early in US dealings, the focus was on corporate earnings. Most results were better than expected and reinforced the positive risk sentiment from European equity markets. Core bond yields maintained an upward bias. This morning, one could have questioned whether the lack of a euro response to good EMU data pointed to some exhaustion of the euro rally. This afternoon it appeared that this wasn’t the case. An new uptrend in European bond yields finally pushed EUR/USD beyond the 1.17 big figure. The 1.1714/36 key resistance came within reach. At the same time, USD/JPY (currently around 111.45) hardly profited from higher core yields and a good risk sentiment. So, for now, the trends of euro strength and USD softness remain in place going into the FOMC decision.
GBP succeeds insignificant comeback
Sterling staged a technical rebound against the dollar and the euro. At the end of last week, the poor results of the first round of negotiations between the UK and the EU weighed on the UK currency. Today’s rebound of sterling was primarily technical in nature. The eco news was intrinsically negative for sterling. The IMF downwardly revised the UK 2017 growth forecast to 1.7% Y/Y (from 2.0% in April). IHS markit also reported that its household financial index dropped to the lowest since July 2014 due to rising costs of living. However, all this didn’t prevent a modest technical rebound of the sterling. EUR/GBP trades currently in the 0.8945 area. Cable returned north of 1.30. The first estimate of the UK Q2 GDP, to be published on Wednesday, will be the next key factor for sterling trading.
