Sunrise Market Commentary

Markets

The US was busy on Friday observing the Fourth of July so doors were shut. Moves during the European session deserve little more than a nutshell recap: stocks up (0.8%), yields up (2–3.8 bps) and the dollar mostly flat. USD/JPY was an exception with initial yen gains evaporating throughout the day. The Japanese currency is extending losses further this morning, pushing USD/JPY back towards the 162 area. So much for the payrolls-driven relief for JPY. EUR/GBP finished the week (well) below the 0.86 support zone. The technical picture as such has deteriorated (improved for GBP) with the next levels to watch now being around the 0.85 big figure. In the core bond space, our attention for the time being is shifting from the front- to the long end of the curve. ECB policymakers downplayed the probability for a back-to-back rate hike in July, citing the ceasefire and coinciding oil price drop as removing the urgency of such a move. Yet it is interesting to see how long-term inflation expectations (e.g. 10-yr) have recently found a bottom around 2%. It suggests the room for further oil-price-driven declines is limited. Add the public finances narrative and there’s enough reason to believe the downside in long-term yields is well protected.

US Treasuries reopen little changed this morning after the weekend festivities. There is little market-relevant news to begin the new week with. The contentious reversal of USA Balogun’s suspension appearing on virtually all financial media front pages serves as a case in point. We do note the ongoing rise in long-term Japanese yields. It’s pushing the likes of the 10-yr and 20-yr to new multi-decade highs. We’ll be looking for this steepening trend to spill over to Europe and the US as well. The US dollar inches higher in technically insignificant trading. The risk backdrop is mixed with some rotation out of the AI sphere. The economic calendar centers around the US services ISM for June. Consensus expects more or less stable sentiment (54.1 from 54.5). Risks, if any, are tilted to the upside with the oil price drop and World Cup potentially causing a boost. A research policy panel in Rome featuring Fed’s Waller, ECB’s Wunsch and Schnabel is worth mentioning too.

News & Views

According to a budget draft seen by Reuters at the end of last week, Germany plans to lift 2027 net borrowing to more than €203 bn. This compares to a €196.5 bn estimate signaled in April. The previous government in 2024 only borrowed €50.5 bn. The 2027 draft budget reportedly allocates total spending of €555.4 billion, more than the €543.3 billion approved in April. Total investment will be €117.5 bn, about €40 bn more than originally planned. New borrowing in the core budget is reported to increase to €118.7 billion, with €54.9 billion borrowed on top through the infrastructure fund and €30 billion through the special fund for defence approved by former Chancellor Scholz. Core defence spending is set to climb to €109 billion in 2027 from €82 billion in 2026 in the core budget. Adding €11.6 billion in funds for Ukraine and €9.4 billion in other security-related spending, such as civil protection, intelligence and IT security, defence spending rises to €130.1 billion. Reuters reports that the approval of this first draft might take place as soon as today.

At the virtual meeting on Sunday, OPEC+ reviewed the global oil market conditions and outlook. The group decided to further raise output/reduce production restrictions decided in 2023 by 188,000 barrels per day. The production hike will start on August 1. The seven countries of the cartel will again meet on August 2. The impact of the decision on global oil supply still remains highly uncertain, dependent on how much oil regional exporters can ship through the Strait of Hormuz as the US and Iran signed a memorandum of understanding that should lead to a permanent halt of the war in the region. After a protracted decline in the oil price since end of April, the price of a barrel of Brent oil currently stabilizes near $72/b.