Markets
Global markets ended the quarter in quite a sluggish fashion. Asian and European equities at the open tried to capitalize on some positive factors, including a good lead from WS on Friday and a solid official China manufacturing PMI. However, the attempt faltered during the day. European equities closed with a losses of about 1% on average. Also the Dow (-0.78%) and the S&P (-0.22%) closed in red. The Nasdaq (+0.67%) again outperformed. There were few data, except for some regional inflation data in Europe. They mostly printed softer than expected (or even negative) but with no big impact on (bond) trading. The US yield curve showed a modest bull flattening with the 2y up 0.4 bp but longer maturities declining up to 2.6 bp (30-y). The decline in LT US yields was again due to a combination of decline in real yields and a more modest rise in inflation expectations. German yields changed between +2 bp (5-y) and -0.3 bp (30y). The decline in the US real yields fueled the recent weakening of the dollar, despite the mild risk-off. The TW dollar (DXY) extensively tested the 92.13 key support/2020 low. EUR/USD tested the 1.1966 range top (close 1.1936). USD/JPY developed a different pattern and rebounded to the 106 area (close 105.91) but that was merely a correction on Friday’s yen strength after resignation of PM Abe. EUR/GBP was/is extensively testing the 0.8938 support (close 0.8928). However, we don’t draw any conclusions yet as UK markets were closed yesterday.
Asian (equity) markets this morning show no clear directional pattern. The China Caixin manufacturing PMI printed stronger than expected at 53.1. Interestingly, the rebound was supported by a rise in export orders, suggesting that the recovery is also gaining traction at China export clients. USD/CNY (6.8230 area) continues its trip south, with the pair touching the lowest level since May 2019. The Reserve Bank of Australia left policy rates unchanged. AUD/USD is testing the 0.74 barrier, mainly on USD weakness. The trade-weighted dollar (DXY sub 92) and EUR/USD are challenging key technical levels.
The eco calendar today contains final EMU manufacturing PMI, EMU unemployment (July) and inflation (August) and German labour market data. In the US, the ISM manufacturing ISM will be published. EMU headline inflation is expected at 0.2% and core at 0.8%. We see risks on the downside. In the US, the manufacturing ISM is expected to rise from 54.2 to 54.8. Fed’s Brainard speaks on the economic outlook. The US ISM is interesting, but it’s not that obvious to assess the impact of the report on current market trends. Especially the dollar is at a key juncture. The established trends of rising inflation expectations and declining real (US) yields have pushed to dollar to key technical levels. EUR/USD sustainably breaking beyond the 1.1966/1.20 area would be a higher profile technical event. Such a break would bring the February 2018 1.2555 top of in scope. The picture for the trade-weighted dollar would be similar if the break below 92.13 would be confirmed. Of late, cable outperformed EUR/USD on the dollar decline, pushing EUR/GBP for a test of the 0.8938 support. However, for now, we’re not convinced that this should continue.
News Headlines
South Korea’s Finance Ministry said it will increase the 2021 budget by 8.5% to 555.8tn Won (some $470bn) to allow for another boost to the economy. That would push government debt to 46.7% of GDP, up from less than 40% at the start of this year. Last week, the country’s central bank revised its growth forecasts for this year and the next lower.
The Reserve bank of Australia kept its policy rate and 3-year target steady at 0.25% but increased the size of its long term funding facility. Highly accommodative settings will be in place for as long as needed even as the RBA now sees the recovery underway in most of Australia. The RBA did not mention the strong appreciation of the currency, mainly as the USD weakens. Last month, governor Lowe judged the A$ to be broadly in line with fundamentals.
