Markets
Fed officials sounded cautious about the economic recovery and said second half growth might be less robust as they saw the virus flaring up in some states, the July minutes showed yesterday. They also worried about the impact from waning fiscal measures. Fed officials provided little new clues about enhanced forward guidance. The division among participants remains with some preferring a calendar‐based guidance while others favor tying it to inflation and employment. The timing of introducing this was vague however. Fed members stay unconvinced about yield curve control, saying it would hold little benefits in the current environment. They did suggest their longer‐term review of monetary policy is about to be wrapped up (September?). USTs strengthened for most of the day but gave up gains eventually. The lack of more clarity on Fed policy going forward, the further reduced appetite for yield caps and other technical considerations (buy the rumour, sell the fact) were at play. A poor 20y auction (tailed 0.9 bps, lower bid‐to‐cover) added to selling pressures. The US yield curve bear steepened with yields up 2.2 bps (10‐yr) to 2.8 bps (30‐yr). Bund yields as well as peripheral spreads barely budged. The US dollar prevented further (technical) losses and even strengthened the back late in the session as (real) US yields more than reversed intraday declines. EUR/USD fell about one big figure from the 1.193 area to 1.184. The trade‐weighted dollar jumped from 92.21 to 92.89 while USD/JPY soared back above 106 (from an intraday low of 105.1). Sterling ignored stronger than expected inflation figures and fell to the euro. EUR/GBP closed at 0.904, up from 0.901.
The Asian scoreboard is colored in red this morning as a more cautious Fed weighs on sentiment. The US imposing more sanctions on Hong Kong (suspending its extradition treaty and ending a tax treatment) adds to the gloomy background. South‐Korea (‐3.6%) underperforms. Core bonds gain. The dollar, if anything, strengthens slightly.
Today’s economic calendar contains US jobless and continuing claims. We think the overall risk mood will dwarf the readings however. Looking at WS yesterday and price action this morning, we could well see some more profittaking in risky assets. Core bonds should remain well protected in the current environment. That’s an ambiguous story for the dollar though. Declining US (real) yields could hurt the greenback while risk‐off is usually supportive. However, after the recent steep declines we’re inclined to give the USD the benefit of the doubt. The failure of Tuesday’s technical breaks to hold also suggests dollar moves might have gone far enough for the time being. EUR/USD 1.1815/23 is a first intermediate support. EUR/GBP bounced off support near 0.90 yesterday. We expect sterling to remain in the defensive also today given the circumstances. The (scarce) news flow from the Brexit negotiations suggest more stumbling blocks (a clash over lorry drivers this time) on the road to an agreement.
News Headlines
The Joint Ministerial Monitoring Committee which oversees the OPEC+ output cut deal agreed upon in April concluded that work still needs to be done. Earlier prognosis that oil demand could return to 97% of pre‐COVID levels by Q4 seem too optimistic with growing risks of a prolonged pandemic. Countries who cheated on their production cut commitment – Nigeria and Iraq – where given until the end of the month to come up with a plan for compensation cuts. Brent crude converged this Summer towards $45/b (technical) resistance.
US President Trump directed Secretary of State Pompeo to notify the UN Security Council that the US intends to restore virtually all of the previously suspended UN sanctions against Iran. Trump raises the stakes one week after the US failed dramatically to gather support to indefinitely extend a UN arms embargo on Iran. It’s uncertain whether the US, as one of the 5 permanent UN members with veto power, has the legal right to do so without support of other members. In any case, it risks drawing an ugly precedent for the UN’s working system.
