Markets
Core bond yields on Monday kicked off the new month in good spirits. German yields rose as much as 7 bps and a little less in the US. That happened even against the backdrop of disappointing retail sales in Germany which declined unexpectedly by 1.6% m/m in June on cuts in non-essentials as inflation bites. In absence of a fundamental driver, we’d label the move an attempt to bottom out after sliding in a dramatic fashion over the course of July. An ”attempt”, because it didn’t last very long. First gains evaporated gradually though not fully amid easing inflation expectations. This was in turn related to news of the first (of potentially many) ships carrying tons of agricultural products leaving one of Ukraine’s ports (see headline). It puts soft commodities under pressure. The likes of oil lose out in a daily perspective too. Brent trades at $101/barrel after hitting resistance around 106.55 last Friday (50dMa) ahead of the OPEC+ meeting this Wednesday. But then word got out that House Speaker Pelosi will indeed visit Taiwan during her Asian tour that started today. China repeatedly warned not to do so and didn’t leave out threats. It fuels geopolitical tensions beyond Russia and the western world and triggered safe haven flows. European swap yields trade mixed between +1 and -1 bp. The 10y risks tests support around 1.63%. German yields drop between 2 and 3.1 bps across the curve. Peripheral spreads narrow slightly nevertheless. Italy (-8 bps) outperforms peers as the 10y yield dropped below 3% for the first time since end May. Bloomberg reported last week that the poll-leading Giorgia Meloni (Brothers of Italy) plans to stick to the (budget) commitments needed to get access to the 200bn euros of EU funds. US yields erase advances of as much as 6 bps to just 0.3 bps at the front and shed up to 4 bps further out as markets go into the release of the US manufacturing ISM (expected to ease from 53 to 52). Stocks held up well until the Pelosi news. Both European and US stocks dip with the latter underperforming (-0.6%).
The dollar remained in the defensive. The euro was able to profit initially, partially helped by the faster rise in yields. EUR/USD hit an intraday high of 1.027, an inch away from intermediate resistance at 1.028. However, as bond yields faded, so did the couple (1.024 currently). Dollar on a trade-weighted basis (DXY) drifts further south (105.55) on the back of a stronger and outperforming (for a third time straight) yen. USD/JPY, now at 132.3 is approaching strong support at 131.25. Sterling shows no signs of nervousness going into the Bank of England meeting on Thursday. The Queen’s money strengthens both against euro and dollar. EUR/GBP drops to 0.836 with technical potential to 0.83 as it is headed for the BoE. GBP/USD jumps to 1.224, extending the bottoming out process in place since mid-July. News Headlines
Hong Kong’s economy rebounded from a -2.9% q/q contraction in Q1 with 0.9% growth in Q2 this year. That was, however, much less than the expected 3%. Compared to the same period last year, growth is now still 1.4% lower. A government spokesperson blamed ongoing cargo flow disruptions between HK and mainland China as well as the recent increase in Covid-19 infections and tighter financial conditions. Details showed that private consumption merely flatlined after contracting 5.8% in Q1 with strict quarantine restrictions for inbound travelers holding back tourism. Goods export also suffered, suffering from falling flows to the mainland as well as the US and EU amid slowing foreign demand. The Hong Kong dollar barely budged given that it is already flirting with the upper bound of the 7.75/7.85 tolerance range. For weeks, the HKMA is intervening heavily in the FX market.
A cargo ship, loaded with more than 26k tons of corn, has left Ukraine’s Odesa port for Lebanon. It’s the first overseas shipment since Russia invaded the country in February and marks an important step towards unlocking millions of tons of stored crops. This is crucial to fend off the threat of a global food crisis. The shipment follows the July 22 agreement to create safe shipping corridors through three of Ukraine’s ports. Prices of soft commodities, led by corn (-2.4%), all declined today.
