Asian and European equity markets this morning failed to join the rally on WS yesterday. Asian equities opened in positive territory, but momentum faded throughout the session. European equites also opened marginally higher after yesterday’s underperformance, but soon dropped into negative territory. We didn’t see a clear trigger for this European underperformance. Whatever the reason, it looks that the relatively positive market bias toward European markets in the wake of the approval of the Next Generation EU deal, is fading. The second wave of corona infections also caused investors to ignore mostly positive EMU eco data published of late. The reluctance on Asian and European markets gradually also caused a broader risk-off tendency. European equities currently show losses of about 0.5% and so do US indices soon after the open. Markets now await the US consumer confidence to be published after the close of this report.
Yesterday, US yields temporary rebounded in a rare countertrend move, supported by a better US equity performance. A mediocre US (2 & 5-year) bond auction also triggered some, albeit modest rise in US yields. However, this trend couldn’t be extended today. US yields again decline between 1 bp (2-y) and 2.75 bp (10/30-y). The US 10-y yield is still holding north of the key 0.54% support. Investors are expecting a soft guidance from the Fed tomorrow. At the same time, how much room is there for LT US yields to decline further if the Fed stays highly reluctant to move to negative policy rates in the foreseeable future? Later today, the US Treasury will sell $44 bln of 7-year notes. The Germany yield curve developed a similar bull flattening even after yesterday’s strong performance. Germain yields again decline between 1.5 bp (2-y) and 2.2 bp (30-y). The German 10-y is again falling below the (symbolic) level of the ECB deposit rate (-0.5 %). In line with the less buoyant sentiment on EMU markets, the spread narrowing trend on European markets also stalled. However, for now the corrective widening remains very limited. (today 2-3 bp for 10-y spreads versus Germany of the likes of Italy, Portugal or Spain).
The FX market the recent protracted decline of the dollar is slowing. The move was at least partially linked to the intra-day price action in gold this morning. Gold, which showed a rather close inverse correlation with the dollar of late, this morning jumped to a new all-time top (S 1981 spot), but this spike was swiftly undone. It is much too early to already speak about a USD correction. However, the correction in gold at least helped to ease recent aggressive US selling. (sliver also showed quite some volatile intraday swings today). USD traders are probably also taking a more cautious approach ahead of tomorrow’s Fed policy decision/press conference. EUR/USD is currently trading in the 1.1730 area. So recent top levels are not are not that far away but the sharp trend halted, at least temporary. The trade-weighted dollar stabilized in the 93.75 area. Contrary to what has been the case until end last week, there was again some, albeit modest, yen outperformance in a risk-off context. USD/JPY is coming within reach of the 105 level (currently 105.15).
In the UK, the (July) CBI retail sales balance rebounded sharply from -37 to +4, the highest level since April last year. Last week, the June official retail sales also printed much stronger than expected. Early this morning sterling already gained a few ticks against the euro and EUR/GBP again filled bids below 0.91 after the CBI release. However, in a broader perspective, the EUR/GBP 0.90/0.9185 range remains firmly in place.
News Headlines
The Spanish economy in the second quarter lost 1,074 000 jobs bringing the unemployment rate to 15.33%, the highest level in 2 year. The rise in unemployment was still mitigated by use of Job protection schemes put in place at the start of the corona lockdowns. Many people also are no included in the unemployment statistics because they don’t meet the technical criteria. The unemployment rate for people under 25 year rose to 39.6%.
