Markets
US investors returned after enjoying a long weekend in observance of Independence Day. However, it hardly brought new impetus to the trading dynamics. With very little in the way of important EMU data, EU (and UK) yields held very tight ranges, changing less than 1.5 bp across the curve. US bonds still see minor follow-through gains after Thursday’s softer than expected US payrolls. With Brent oil currently holding in the $71–72 p/b area, quite some inflation improvement may be discounted. The theme of fiscal sustainability continues to linger. Long-term Japanese government bond yields again touched multi-year peak levels for the 10-y and 20-y (4.1 bps and 3.8 bps respectively). After an unconvincing 10-y auction last week, a next reality check comes as soon as tomorrow, with a 30-y JGB auction. Moves in intra-EMU government bond spreads (vs swap) still develop orderly. Still, spreads vs swaps (10-y) of the likes of Italy (72 bps), France (73 bps), Belgium (51 bps) or Spain (43 bps) are off the levels before the start of the conflict between the US and Iran. On other markets, several tech/AI-related indices again traded volatile this morning (Kospi, e.g.), but some calm returned. The EuroStoxx 50 touched an all-time record, but currently cedes 0.4%. US equities also again try to overcome doubts on tech/AI. The Nasdaq gains 0.85% at the open, but price action last week shows that intraday trends can change quickly.
On FX markets, the dollar gains modestly despite a limited loss in interest rate support. DXY regains the 101 mark. EUR/USD eases from 1.144 to 1.142. For now it’s not clear yet whether (and to what extent) sustainability of public finances might affect the likes of the euro, the dollar and/or sterling. Fiscal intentions of the Burnham government still have to be concretized, but sterling continues to perform quite well. After last week’s break below EUR/GBP 0.86, sterling today again gains a few ticks against the euro, nearing the 0.855 area. Japanese authorities didn’t use Friday’s ‘USD correction’ post-payrolls or lower market liquidity to force out some JPY shorts. Today at least it looks that this window of opportunity is closing with USD/JPY rebounding near 162.3 compared to a 160.49 low on Friday and a multi-year top of 162.84 earlier last week. The combination of a 30-y auction, the yen testing multi-year lows and Japanese authorities playing some kind of poker with markets on the intervention strategy, might cause quite a hefty mix tomorrow morning. After finishing this report, the US services ISM still will be released, but probably a big surprise is needed to trigger a sustained market reaction.
News & Views
The European Stability Mechanism, lender of last resort for euro area countries, released its inaugural annual Euro Area Stability Watch report today. It warns the bloc won’t be immune to the shocks that lie ahead. The ESM sees three important pockets of vulnerability. The first one is eroding fiscal space, in part driven by increased defence spending needs. The second is a structural exposure to energy supply disruptions stemming from geopolitical tensions. Lastly, the ESM says European investors are exposed to a potential repricing of US Treasuries and equities. It added that EA sovereign markets meanwhile are becoming increasingly reliant on price-sensitive investors (e.g. hedge funds). The ESM came up with an adverse scenario (relative to the European Commission’s baseline), defined as two shocks materializing simultaneously: prolonged geopolitical tensions which raise energy prices and keep uncertainty high, and a sharp repricing of US assets. That would push the euro area economy into a recession with negative y/y growth through 2027 Q4, raise inflation to almost 5% by end 2026 and put public debt on a further upward path. The ESM urges countries to quickly rebuild fiscal buffers, spend efficiently and advance structural reforms so they come prepared when the next shock hits.
Belgium’s budget monitoring committee in a preliminary estimate offered to the government said an additional €7.9bn fiscal effort is needed by end-2029 to be compliant with the European deficit rules (expenditure-based), several Belgian news outlets reported. The Middle East conflict, which resulted in higher inflation and lower economic growth, and a higher interest rate burden has thrown government finances further off track. The €7.9bn is significantly more than the €4.9bn the committee expected in its March report and topped the approximately €7bn the government had been bracing for internally. An unchanged policy would lift the budget deficit by the end of De Wever I in 2029 to 5.8% and further to 6.3% in a five-year horizon. The debt ratio would climb from 108% this year to 117% in 2029 and 122.8% in 2031.
 yields held very tight ranges, changing less than 1.5 bp across the curve. US bonds still see minor follow-through gains after Thursday's softer than expected US payrolls.){kind=link}