Markets
Brent crude rallies from $74.5/b to $76.5/b, the highest level since the end of 2018. The move comes as people close to today’s OPEC+ meeting indicate that consensus is building around a 400k b/d output increase in August and the possibility of gradually adding around 2m b/d between August and December. Oil profits as markets on the one hand discounted a higher output hike in August, while they on the other hand embrace the prospect of a very easy return to normal. Spill-over effects to other markets are very limited. European stock markets gapped higher at the opening bell, but risk sentiment dwindled somewhat throughout trading. Gains for main indices currently amount up to 0.5%. Core bond hold to small gains with an outperformance of the very long end. Daily US yield changes vary between +0.2 bps (2-yr) and -1.5 bps (30-yr). A bigger than expected decline in weekly jobless claims (364k from 415k; new cycle low) bodes well for tomorrow’s payrolls (together with yesterday’s ADP), but didn’t influence intraday trading dynamics. The German yield curve steepens marginally with daily changes varying between -0.6 bps (2-yr) and +1.1 bp (30-yr). The waiting game thus continues. The single currency outperformed on FX markets. EUR/USD attempted a break below the post-FOMC low at 1.1848 already ahead of the ISM and payrolls, but that test failed. Return action brings the pair back to 1.1870. The dollar does take the upper hand over the yen thanks to the positive risk climate. USD/JPY rises to the highest level since March last year, above 111. Sterling is again weaker with EUR/GBP near 0.86; still in the middle of the dull sideways range. Bank of England governor Bailey warned that the BoE shouldn’t overreact to a temporary inflation rise. He already seems to try to divert pressure away from the August Monetary Policy report to the November one. The Bank of England’s QE programme runs until the end of the year. By waiting until November, they try to put themselves in the freerider position after potential key policy meetings by the Fed and by the ECB in September.
News Headlines
The Swedish Riksbank kept policy rates steady today at 0%. It refrained from penciling in a first rate hike in 2024 even as growth forecasts were upped once again. By not doing so, it wrongfooted a part of the market that expected the central bank would take a step towards policy normalization. It intends to exhaust its SEK 700bn big bond buying envelope by the end of the year and will reinvest proceeds from maturing bonds at least through 2022. The Riksbank repeated it can cut rates further “or in some other way make monetary policy more expansionary” if inflation prospects weaken. The central bank expects the current inflation uptick to be temporary and to reach target at the end of the policy horizon (CPIF seen at 2.1% in 2024). The Swedish krone loses marginally vs the euro, sending EUR/SEK to 10.17.
UK Chancellor Sunak stopped short of saying he gave up on the financial services equivalence with the EU. Under such a regime, UK’s financial firms would have full access to the EU and vice versa. The issue is particularly important for the City of London after it left the EU thus losing the entry point. The EU however is keen to bolster its own financial sector. Sunak said the UK will use its post-Brexit freedom to strike new accords and deepen relationships with China, India and Brazil as an open financial hub.
Andrea Enria, the ECB’s head of supervision, told the European Parliament that he would lift the cap on dividends and share buybacks at eurozone banks. Last year when the pandemic struck, the ECB ordered banks to stop all capital distributions. That changed since the start of this year but there was a hard limit. The ECB now has more clarity on the financial strength he said, adding that banks had “proven to be resilient so far” thanks to robust capital positions and recovering profitability from the second half of 2020 onwards. The cap is planned to be removed as of the end of the third quarter this year.
