Markets
Markets took a guarded start to the new trading week. Asian equities opened in positive territory supported by a strong lead from WS on Friday and a good August China PMI (54.5). However sentiment dwindled as the session proceeded, with Japan the only market to keep a significant gain. European markets show a similar pattern, mostly opening in green, but failing to build on that momentum. Gains were reversed in afternoon trading as US indices open mixed to slightly lower. Most European indices are nearing or even testing key technical resistance/post March highs, but even with ample global policy support, there is no strong enough trigger to force a sustained/convincing break higher. Several European countries including Spain and Germany published HICP inflation data well below the ECB’s 2% target. Spain printed as expected at 0.5% Y/Y. German and Italian inflation even turned negative respectively at -0.1% Y/Y and -0.5% Y/Y. However, this disinflationary narrative had little impact on European/global yields. The German yields even keep a cautious upward bias rising between 1 bp (2-y) and 1.5 bp (5/10-y) In this respect, the German 10-y continues testing the 0.37% resistance area. In an interview, ECB’s Schnabel gave some comments that might be considered as slightly hawkish. As recent developments are more or less in line with the ECB’s baseline scenario, she sees no need to provide additional stimulus, including the size of the PEPP. Changes in intra-EMU peripheral spreads are negligible today. In a market devoid of important data, US yields change less than 1 bp. Still, this leaves part of the ‘post-Powell’ steepening in place.
On the FX markets the dollar continues fighting an uphill battle. The trade-weighted dollar (DXY) is challenging the 2020 low, currently trading in the 92.20 area. The prospect of the Fed keeping interest rates low for very low aiming an temporary overshoot of the 2% symmetrical inflation target continues depressing the dollar. A sustained break below the 92.13 area would further deteriorate the technical picture of the US currency. EUR/USD (1.1935) is also returning higher in the ST consolidation pattern with the 1.1966 2020 top again within striking distance. The EUR/USD move is in the first place USD driven, but ECB’s Schnabel (cf supra) indicating that she’s not worrying too much about the euro exchange rate also supports the intraday EUR/USD rebound. Even so, the euro is also well supported against the likes of the yen and sterling. EUR/JPY (126.60 area) is also nearing the 2020 top. A break of this level could trigger some further stop-loss buying euro buying. USD/JPY (106 area) decouples from the broader USD downtrend and tries to reverse part of the yen rise on Friday as Japanese PM Abe announced to resign. UK markets are closed today. Still, sterling is reversing part of Friday’s ‘remarkable’ gain. EUR/GBP temporarily dropped below interim support at 0.8938, but with EUR/GBP again trading in the 0.8960 area, the break is not confirmed. Headlines this weekend that the UK government is pondering the need for a tax hike to address the big hole in its budget is probably weighing on sterling.
News Headlines
Fed vice-chair Clarida talked on the central bank’s new monetary policy framework. In concluding thoughts he reiterated that with credible forward guidance and asset purchases in place, the general view is that potential benefits may be modest. The situation could be reassessed in the future. Negative policy rates aren’t considered as an attractive policy option in the US..
The final Q2 Italian GDP print faced a downward revision from -12.4% Q/Q to -12.8% Q/Q. Details showed household spending falling by 11.3%, exports sliding by 26.4% and investments crashing by 14.9%. The unemployment rate tomorrow is expected to show an increase from 8.85% to 9.1%. August PMI’s will be released tomorrow and on Thursday.
