Markets
Market sentiment remained fragile during yesterday’s Asian and European session. Stocks slid in a catch-up move with the US. Some ECB officials suggesting the PEPP envelope should be viewed as a ceiling during the latest meeting might have weighed on the mood also. Wall Street still forced a close in the green even as US data (jobless claims, Philly Fed business confidence) disappointed. Risk appetite improved amid hopes for US fiscal stimulus talks to restart maybe as soon as Saturday, despite the Summer recess (see below). Core bonds gained though were off intraday highs. USTs outperformed the Bund with yields slipping 3 (10-yr) to 4 (30-yr) bps. Interestingly, the decline in real yields halted. The US 10y real yield stabilized at -1%. German yields declined 2.4 bps (10-yr) to 3.6 bps (30-yr). Peripheral spreads widened slightly. Italy and Greece underperformed (+3 bps). The dollar traded volatile, turning gains into losses and vice versa. USD weakness prevailed in the end with the trade-weighted measure giving up the 93 level after all (close at 92.79). EUR/USD rose slightly from 1.184 to 1.186. USD/JPY’s arm-wrestling over the 106 barrier turned out a victory for the yen. The pair closed at 105.8. A resilient sterling staged an impressive rally to the euro even as pessimism surrounds Brexit talks. Part of the move higher was technical in nature due to broad dollar weakness in final European trading hours. EUR/GBP fell towards important support levels at around 0.898.
Asian stocks inch higher this morning, building on yesterday’s US performance. News on Covid-19 vaccines from several companies being on track for a regulatory review also lifts sentiment. South Korea (+2%) outperforms after the slide in trade data showed signs of easing. Stock futures point at a green opening, core bonds are steady. The dollar extends yesterday’s late decline. USD/CNY briefly touched the weakest level since January 6.90 before paring some of the losses. EUR/USD advances to 1.188. USD/JPY and DXY decline further to resp. 105.56 and 92.6.
Today’s eco calendar is all about PMI business confidence. The Japanese reading this morning showed the rebound is stalling. We could see a similar picture in Europe. While there could be some room for an improvement in the manufacturing gauge, the services series already soared to or even beyond 2019 levels. With the rise of coronavirus cases in countries including France and Germany, we don’t rule out a slight negative surprise. However, it probably won’t hurt sentiment or EUR/USD much as the dollar still looks vulnerable even as US real yields don’t decline further. The sideways EUR/USD 1.17/19 trend channel should in any case remain intact. We hold a neutral to slightly negative bias on core bonds. Sterling is trading near key technical levels to the euro. In the light of yesterday’s rally and the downbeat comments on Brexit talks, we think the move has gone far enough. We don’t expect a sustained break below EUR/GBP 0.896/0.898 going into the weekend.
News Headlines
July Australian retail sales increased by 3.3% M/M with all states reporting advances apart from Victoria where an increasing number of coronacases triggered a re-introduction of Stage 3 stay-at-home restrictions. Those same restrictions plunged the Australian services PMI for the first time in three months back in contraction territory (48.1 from 58.2). Details showed new orders falling solidly and a quickening of the rate of decline in jobs. Input cost inflation rose to the fastest in 6 months. AUD/USD didn’t react to the data, changing hands around the 0.72 mark.
Several fiscally conservative Democrats, members of the Blue Dog coalition, urged Congress hot shots Pelosi, Schumer, McCarthy and McConnell to restart bipartisan, bicameral negotiations on a 5th COVID-19 relief package that is commensurate with the scale of the current crisis. They should use the preparation for this weekend’s vote to protect the United States Postal Service as an occasion.
