Markets
We’ll be brief about yesterday since data was scant and the US was closed in observance of Independence Day. European equity markets started the week cautious following a mixed Asian session, slumping about 0.65% in the open (SX5E). Sentiment turned for the better soon though and stocks eventually managed to leave the red behind. European/German yield curves bear steepened, adding 2.5bps at the long end. The German 10y yield still finished sub -0.20% support though. The dollar traded in a tight sideways range. EUR/USD closed unchanged around 1.186. USD/JPY struggled to hold 111. The British pound was better bid against most major peers, perhaps eying the final stage of the economic reopening as announced by Johnson. The British PM said the remaining capacity curbs and social distancing are expected to end July 19. EUR/GBP drifted further south of 0.86 (close 0.857).
Asian stocks lack guidance from the US as well, trading without a clear direction. China underperforms for a second day. The RBA kept the policy and 10y target rate stable at 0.1% and extended its bond buying program (see headline below). The Aussie dollar overcame knee-jerk weakness to trade at AUD/USD 0.757. The kiwi dollar is doing particularly well amid rising bets on a rate hike already this year. NZD/USD takes a leap to 0.709. The USD generally trades a tad weaker, as seen in EUR/USD and USD/JPY too. The former inches higher to 1.879, the latter eases towards 110.82. US yields get a 2 to 2.5bps bump in the first cash trading of the week. The move is partially driven by higher oil prices as OPEC+ failed to smooth things out with the UAE. There’s no deal, meaning the discussed 400k barrels a day production increase from August onwards won’t materialize, triggering fears of squeezing an already tight market. There’s no new round of discussions planned. Brent oil gapped beyond $77 per barrel.
The calendar isn’t particularly well filled today either but we do keep an eye on the (delayed) US services ISM (June). Consensus expects a marginal easing from 64 to 63.5. Risks are slightly tilted to the downside given the historic highs the indicator is at and effects of the reopening maybe starting to fade in the US. At levels still north of 60 (for example), there’s absolutely no reason for worry of course. If anything, a disappointing but very solid reading could be viewed as the perfect Goldilocks scenario with a topping out of the data easing normalization pressure on the Fed but still suggesting nice growth going forward. In a daily perspective, US yields could shed a few bps with the long end of the curve looking most vulnerable. First support in the 10y yield situates around 1.4%. EUR/USD 1.1916 is the first resistance that could get attacked in case of dollar weakening. Sterling enjoys the ST momentum but resistance in EUR/GBP at 8.8472 isn’t easy to take out as long as the BoE sticks to its wait-and-see approach.
News headlines
The Reserve Bank of Australia this morning left its policy rate unchanged. The RBA maintained the April 2024 government as the reference for its 3-y yield target. The bank will continue to buy government bonds after the completion of the current program early September. Purchases will run at a rate of A$ 4 bln per week at least until November when the RBA will make a new assessment. The economy recovers faster than expected and employment improves significantly as more Australians now have a job compared to before the pandemic. Even so, the RBA intends to keep the cash rate at current level until the economy has returned to the full employment and until actual inflation will sustainably return to the 2-3% target. The RBA doesn’t expect that to happen before 2024.
A quarterly survey of the New Zealand Economic Institute of Economic Research (NZIER) indicated a sharp improvement in sentiment among businesses. 10% now expect business conditions to improve while 8% expected a decline at the previous quarterly survey. Firms also reported a further tightening of labour market conditions with difficulties to hire skilled workers. NZIER measured capacity utilization to have risen to 94.9% from 93.9%. It also indicates that capacity constrains point to rising inflation. The 2-y New Zealand government bond yield rose 9 bp to 0.825 this morning as market bring forward expectations for a first RBNZ rate hike. The 10-y rose 4.5 bp to 1.825. The Kiwi dollar jumped form the NZD/USD 0.70.20 area to currently trade near 0.7080.
