Markets
Investors yesterday initially didn’t know which card to play. Asian markets traded mixed. European markets opened in negative territory. The UK ordering tourists returning from Spain to go in quarantine was a high profile warning that the reopening of the European economy was at risk of being slowed by a second wave of corona. German IFO business climate improved more than expected but didn’t convince EMU investors. European equities closed with modest losses. US equities were in better shape and finally took the way north again. US investors apparently again felt comfortable with the idea that slower growth due to the flare up of corona will likely be accommodated by a prolonged period of a monetary and fiscal support. Headlines on different companies reporting progress on a corona vaccine also again supported sentiment. Despite a strong Ifo, the German yield curve bull flattened with yields declining 1.5 bp (2-y) to 5 bp (30-y). US yields initially also ticked marginally lower but rebounded. The 2 and 5-year auctions printed at record low yields but some parameters were modest. Both sales were awarded above the WI bid, putting modest upward pressure on US yields. The US curve showed a modest bear steepening with the 30-y yield rising 3 bp. This was in contrast with recent trend of declining long term US yields/flattening yield curve. A better US equity performance, a widening interest rate differential in favour of the dollar and solid US durable goods orders, it all still didn’t help the dollar. USD selling again resumed early in US dealings. EUR/USD touched the 1.1780 area and closed at 1.1752. The trade-weighted dollar declined further below 94 as did USD/JPY (close at 105.37). There were no important data or events in the UK yesterday. In technical trading, sterling extended gains against the dollar but remained in the defensive against the euro (EUR/GBP close at 0.9123).
This morning, Asian equity indices mostly opened in positive territory, but gains are modest compared to the WS yesterday and the intra-day trend is a hesitant. Yesterday evening, the US Republican party published its pandemic relief plan. The plan includes lower aid for unemployed compared to current scheme. Interesting, US (LT) yields are again rising marginally and the decline of the dollar shows tentative signs of slowing. USD/JPY is trading in the 105.60 area. EUR/USD returned to the 1.1730 area. In the same move, gold still touched a new record ($1981) this morning, but returned its earlier gain (currently (1940 area).
Later today, there are no important data in EMU. In the US, House prices, the Richmond Fed manufacturing index and consumer confidence (Conference board) will be published. Consumer confidence is expected to ease from 98 to 95 as uncertainty in the impact of the corona virus is expected to weigh on sentiment. Last week, the market temporary turned a bit more cautious as the rise in jobless claims was seen as warning on additional negative fall-out from corona on the economy, especially on employment and on final demand. At the same time, investors might take a cautious approach going into tomorrow’s Fed meeting. In this respect we keep an eye on the technical graphs of the US (10-y) yield. Despite expectations for the Fed to stay soft and reconfirm an accommodative policy stance, the 0.55% area looks a tough support for the 10-y yield. Later today, the US will sell 7-year bonds. On the FX market, the dollar developed an unidirectional downtrend of late. However, the ‘rise’ in US yields and gold quickly returning from a new record top this morning might suggest a slowdown of dollar decline short-term. However, for now there is no reason to expect a trend reversal yet. In the UK, the CBI July retail data will be published. We don’t expect a real comeback of the sterling against the euro yet.
News Headlines
In the US, the Senate Republican party yesterday evening proposed its $ 1 trillion fiscal aid package which will be the basis for negotiations with the Democrats. The packages includes another payment of $ 1200 for most Americans, reduced additional support on top of unemployment benefits compared to current $ 600 per week and measures to protect schools and businesses against lawsuits on corona infections.
