Sunset Market Commentary

Markets

The new trading week started with some risk-off. Growth concerns took the upper hand following Chinese Q2 GDP numbers published in early Asian dealings this morning. There were some green shoots, including the better-than-expected June industrial production figures, but markets dismissed them. European equities slip more than one percent. Technical charts supported the downleg. The EuroStoxx50 tested the strong 4400 resistance area end last week. Failing to push through instead triggered a countermove lower for a fifth time since April. Core bonds advanced, pushing yields in the euro area and US several bps lower before paring declines after a stronger-than-expected NY Fed Empire index. The headline figure eased from 6.6 to 1.1, pointing at marginally increasing factory activity. This compares to the -3.5 consensus was expecting. Both prices paid and received eased further to the lowest level in two years but the gauges for six months ahead picked up. New orders stabilized at a low level while the employment subindex for the first time since January hit positive territory again. The business outlook six months ahead deteriorated a few points to 14.3 to remain around the highest levels since mid-2022. US yields erased all previous losses of as much as 6 bps to trade flat for the day. German rates join the US trading pattern and drop 0.8-2 bps with the wings underperforming the belly.

The currencies Down Under are today’s laggards. That should come as no surprise since the risk-off can be traced back to slowing growth in one of Australia’s and New Zealand’s most important trading partner. AUD/USD goes into it’s second day of declines to test the 0.68 big figure. NZD/USD in a parallel move goes from 0.636 to 0.633. Commodities feel the pressure as well with oil losing 1.4% to further slip sub $80 again. Soft commodities, and especially wheat, are doing much better. It follows Russia’s decision to terminate and not to extend the UN-Turkey brokered grain deal, potentially limiting world supply ahead of the harvest season (see headline below). Other currency pairs trade extremely tight ranges today. EUR/USD moves sideways around 1.123. The trade-weighted dollar stages an unconvincing attempt to recoup the 100 barrier. EUR/GPB bounces towards the 0.86 area in technical trading with sterling on edge for Wednesday’s CPI numbers.

News & Views

Russia today formally withdrew from the Black Sea grain deal brokered last year to export Ukrainian grain across the Black Sea. Since the deal, around 33 million of commodities have exported from Ukraine. Russian president Putin’s spokesman Peskov said that western sanctions should be removed to bolster trade (eg reconnecting an agricultural bank to the SWIFT international payments system) in a parallel agreement under which the UN vowed to improve access to Russian food and fertilizer exports. In November of last year, Russia already ditched the Black Sea grain deal for one day, before Turkish President Erdogan helped agreeing an extension. Putin and Erdogan meet again in August with exit deal becoming one of the key talking points. Wheat prices spike around 2%  higher on the news today.

Polish monetary council member Duda said in a Business Insider Polska interview that the MPC will have arguments to carefully discuss interest rate cuts as soon as after summer holidays. Of course given that they see a fast decrease in inflation, putting it on permanent downward trend in the long term. She thinks that inflation could fall into single digit territory faster than the current NBP forecast of Q4 2023. Polish prices have not increased M/M in the last two months, providing evidence for the ongoing disinflation process. Falling energy and food prices are slowing down global price growth. Supply chains have improved. These are other elements limiting price pressure. Polish swap rate today drop up to 15 bps in the 5-10yr bucket of the curve. The Polish zloty holds firm though, changing hands near recent tops around 4.45.