Markets
Last Friday’s European PMIs reminded markets the coronavirus is still very much present. Dire readings in especially the services sector after the reintroduction of some lockdown measures prompted a selling wave in EMU stocks. Sentiment turned for the better by the time the US joined dealings. Better-than-expected PMIs as well as a roaring housing market helped lifting spirits. European equities eventually closed about 0.5% in red. WS printed gains of up to 0.7%. Core bonds gained though closed off intraday highs. The US yield curve bull flattened. Yields fell up to -4.2 bps (30-yr). German yields declined about 1 bps at the belly of the curve. Peripheral spreads widened with Italy lagging peers (+4 bps). Euro weakness in the wake of the poor PMI readings prevailed on FX markets. EUR/USD fell from an intraday high near 1.19 to just shy of 1.18. An attempt by the dollar to extend EUR/USD losses after US PMIs failed. The euro move was also visible in the trade-weighted dollar. DXY jumped from 92.7 to 93.25. Sterling was hit after another round of Brexit negotiations yielded no real progress, on the contrary. EU’s Barnier said an agreement is unlikely at this stage, after which the pound gave up early gains to trade back above 0.90 to the euro.
Asian markets go up this morning. Lack of economic news is good enough reason to continue the established trends of ever higher stocks. South Korea (+1.9%) outperforms. Core bonds trade unchanged. New Zealand’s 10-y bond yield drops to a record low. PM Ardern will extend the Auckland lockdown until August 30. The kiwi falls towards 0.653 to the USD. EUR/USD is going nowhere near the 1.18 pivot in a quiet session, as is DXY (93.22) and USD/JPY (105.88). USD/CNY briefly touched 6.90 last Friday but failed to push trough with the pair now trading back at the 6.92 area.
Today’s economic calendar will add little to trading. Markets will mainly focus at a key speech by Powell this Thursday at the now virtual annual Economic Policy Symposium that usually takes place in Jackson Hole. Expectations for any new policy tweaks are low, especially after last week’s rather vague meeting minutes. The Fed chair might however provide more details on the strategic review that is drawing to a close, including the possibility to adopt “symmetric inflation” as the central bank’s formal objective, allowing the Fed to overshoot the current 2% target for a period of time. In any case we expect Powell to sound dovish. Core bonds and USTs in particular might thus hold op relatively well in the days ahead. That might keep a lid on the dollar too. The US currency managed to leave recent lows behind in a sign the sell-off has gone far enough for now. However we don’t expect technical breaks to occur in the run-up to Powell’s speech. EUR/USD support is situated around 1.17. For DXY we’re looking at the 94 area. Sterling is in for a calm week with only informal Brexit talks scheduled. After last week’s disappointing outcome, there’s room for further sterling losses in the 0.898/0.91 (triangle) trading range.
News Headlines
The FT cites several sources involved in high-level bipartisan talks saying that the US governments would ask the Food and Drug administration to award Emergency Use Authorization (EUA) ahead of the November elections to a Covid-vaccine developed by AstraZeneca in collaboration with Oxford University. Their current study lacks the critical numbers for normal authorization. It risks creating a rift with the FDA, who isn’t in favour of fast-tracking and continues to put the Q1 2021 deadline forward. President Trump said we’ll be hearing about the vaccines very soon.
Rating agency Fitch downgraded the outlook on Turkey’s BB- rating from stable to negative. A depletion of FX reserves (interventions), weak monetary policy credibility, negative real interest rates, and a sizeable current account deficit partly fueled by a strong credit stimulus, have exacerbated external financing risks. Last week, the Turkish central bank pulled back from hiking policy rates, favouring tightening by stealth (tweak cost of funding by modifying amount of available liquidity). EUR/TRY continues trading near all-time highs, north of 8.50.
