Markets
Markets still haven’t figured out what card to play after altering Fed messages/guidance since last week’s policy meeting. Still, this indecisiveness not only applies to the US. European investors also remain kind of disoriented as illustrated by the reaction to today’s EMU PMI’s. The EMU economy in June recovered as hoped for, or even faster than expected. The EMU composite PMI showed accelerating growth with but services (59.2) and manufacturing (63.1) printing above consensus and the composite figure (59.2) at the highest level in 15 years. IHS market even sounded lyric on the economy: “The data set the scene for an impressive expansion of GDP in the second quarter to be followed by even stronger growth in the third quarter”. Supply clearly struggles to meet accelerating demand, resulting in an unprecedented backlog of work and depleted inventories even as firms continue to hire. The result is outright inflation as firms have ever more pricing power to pass through rising costs. On a country level German growth reaccelerates both in services and manufacturing. France just missed expectations. European markets often react rather stoic to regional data. Even so, it is a bit remarkable to see Bunds outperform Treasuries after such a set of data. The German yields turned into the red, easing between 0.8 bp (2-y) and 1.7 bp (5& 10-y). 10-y Intra-EMU spreads versus Germany are little changed to marginally tighter. US yields are reversing part of an earlier intraday rise as the US (services) PMI unexpectedly dropped. US yields are rising up to 2.5 bp for the 30-y. The relative calm on the interest rate markets this time hardly supports equities. EMU markets are ceding <0.50%. US equities open little changed, but the Nasdaq is again testing all-time record levels. Some commodities (including copper) show signs of bottoming but not enough to really revive reflationary spirits yet. Brent oil also extends gains north of $75 b/p.
Contrary to the reaction on EMU bond markets, the euro captured a better bid after the PMI release with EUR/USD currently testing 1.1970. Admittedly, the move is also at least partially USD softness in the wake of more balanced Fed-speak from the likes of Powell and Williams and a disappointing US PMI. The TW USD (DXY) eases to the 91.60 area. UK markets are counting down to tomorrow’s BoE policy decision. It is maybe still a bit too early for the BoE to clarify a detailed path to policy normalization. The UK preliminary PMI’s were strong (composite PMI at 61.7) but slightly softer than expected. Sterling outperformed early this morning, but momentum eased later. At EUR/GBP 0.8550, sterling trades marginally stronger in a daily perspective. The Czech National Bank today raised its repurchase rate as expected from 0.25% to 0.50%, following yesterday’s Hungarian example of starting with policy normalization. The Czech krone maintains recent strength with EUR/USD hovering near 25.45.
News Headlines
Irish Minister for Finance Donohoe announced that the government will sell part of its 13.9% shareholding in Bank of Ireland (current market value €670mn) over the next 6 months. It’s the first such sale since 2017 based on confidence in the economy to recovery from the pandemic. Sales in the government’s share in AIB and Permanent TSB, which also date back to the €29.4bn financial sector rescue over the 2009-2011 period are currently not under consideration. Bank of Ireland is the only Irish bank to have repaid the Irish taxpayer for its support, with the state generating a net positive cash return of at least €1.2bn.
The Bank of International Settlements strengthened its criticism against digital currencies. They argue that central banks are at the centre of a rapid transformation of the financial sector and the payment system. Innovations such as cryptocurrencies, stablecoins and the walled garden econosystem of big techs all tend to work against the public good element that underpins the payment system. Earlier this month, the Basel Committee suggested tougher capital rules for holding digital assets. The BIS does support the development of digital currencies backed by central banks.
