Markets
A string of disappointing Chinese data set the tone last Friday, especially for EMU markets. Stocks there closed in the red (about -1.5%) though were off intraday lows. Wall Street closed more or less flat despite last-minute buying. July US retail sales were better than expected but clearly moderated after strong months of pent-up demand. U. of Mich. consumer confidence for August meanwhile failed to rebound. Core bonds grinded higher with USTs outperforming after last week’s record supply drove US yields to the highest level in a month. US yields declined 1.8 bps (2-yr) to 2.5 bps (10-yr). The German yield curve marginally bull flattened with yields falling 1 bp at the long end of the curve. Peripheral spreads were mixed. Italy and Portugal widened 2 bps, Greece tightened (-2 bps). Unconvincing US data and the modest yield decline outweighed the in theory positive impact of a fragile risk sentiment on the dollar. The greenback traded heavy, losing a few ticks towards the 93 area on a trade-weighted basis (DXY). EUR/USD swapped European losses for US gains and ended around 1.184, up from 1.181. USD/JPY’s early attempt to take out 107 failed and closed at 106.6 eventually. EUR/GBP made a sharp intraday V-shaped swing in technical trading. Sterling strengthened towards the 0.90 support area before undoing all gains. EUR/GBP closed higher around 0.905.
Overnight news is extremely thin. The US and China were supposed to review the progress made in the phase-one trade deal but talks were delayed last-minute. Asian stock markets trade mixed. China outperforms (+2.5%) after its central bank injected more cash into the system, suggesting a looser monetary stance. The yuan strengthened to close to but above USD/CNY 6.94. The dollar remains in the defensive overall this morning. EUR/USD rises towards 1.186, testing last week’s high. DXY risks falling below 93. USD/JPY is going nowhere after Japanese Q2 growth showed a record 7.8% q/q decline, mainly as private consumption slumped. Core bonds inch higher.
The economic calendar won’t be trading’s biggest inspirator today. US’s NY manufacturing index is expected to ease to 15 after a massive surge from pandemic lows at -78 brought the indicator back to the highest level since November ’18. Risks are tilted to the downside but we expect no major impact on markets. EMU PMI confidence might be a different story but are due on Friday. Until then, core bonds might recover from last week’s bear steepening in a technical trading session. Dollar weakness proved very persisting over the past week. We see no compelling reasons for that to change given the lack of news and data and the ongoing fiscal stalemate in Congress. That said, EUR/USD 1.19 is key resistance and won’t be that easy to crush. Sterling investors have highlighted the new round of formal Brexit talks starting on Tuesday. Despite all good intentions, the water is still quite deep without signs of a short-term breakthrough. EUR/GBP (0.906) might continue this morning’s upward slope.
News Headlines
The Kremlin indicated readiness to address Belarus leader Lukashenko’s call for support to clamp down on national protests. Russian President Putin wants to help in resolving problems, including within the countries’ securities alliance “if necessary”. The latter is a collective defense security pact of former Soviet states.
The FT reports that European Commission executive VP and financial services chief, Dombrovskis, said that the EU would not be ready in coming months to assess whether the UK qualifies for equivalence provisions. The main reason is the EU’s recent overhaul of rules for investment firms. Lack of equivalence doesn’t directly imply that UK-based companies would be shut out of the EU market after the end of the transition period, but that regulators would have the strike deals on a country-by-country basis.
