Markets
The second round of the US-Iran conflict entered its sixth consecutive day with strikes intensifying from both sides. Iran retaliated against water desalination and power generation plants in Kuwait and doesn’t seem to let go of its renewed grip over Hormuz. The threat to drag Houthi rebels and Bab-al-Mandab into conflict remains in place as well. Brent crude currently changes hands above $86/b compared to this week’s high of $87.45/b and an early July low around $70/b. The European reference contract for gas prices, Dutch TTF, rises from €55/Mwh to almost €58. At the height of the war back in March, it only traded for four days above €60/Mwh. The duration of the energy price shock is one of the key considerations for the ECB in deciding policy calibration. A benign June CPI print created some breathing space going into next week’s policy meeting. Money markets only attach 6.5% probability to a back-to-back rate hike scenario. They are nevertheless prepared for a vigilant message including readiness to act again in September, when the ECB updates its scenario analysis. Such move is 90% discounted with a third (this cycle) priced in by March 2027.
The impact of the new phase in the war on other markets is modest today. Core bond yield curves flatten slightly with the front end slightly higher and the (very) long end grinding lower. The dollar takes a small advantage over its main trading partners but is going nowhere at EUR/USD 1.1425. If any, this week’s trading implies that the USD-downside is protected with relatively small losses following CPI and PPI numbers. European stock markets join the downbeat mood from the US yesterday and Asia this morning with the EuroStoxx50 currently 1.25% lower. From a technical point of view, the index is testing the neckline of a head-and-shoulders formation at 6200. The final target (in case of a break) stands at 5970. US stock markets open 1% to 1.75% lower with the Nasdaq (25413) underperforming. Key support stands at 25k (neckline closing triangle formation).
News & Views
Japanese Prime Minister Sanae Takaichi joined the recent debate in which members of the government elaborated on the Government Pension Investment Fund (GPIF) potentially allocating a bigger share of its reserves into domestic assets, including Japanese government bonds. The discussion occurs against a background where both Japanese government bonds and the yen are facing ongoing selling pressure of late. Even as GPIF has its own rules and procedures to set its asset allocation, also PM Takaichi repeated arguments that earlier were brought forward by Fin Min Katayama. In this respect, she advocated that with Japan moving to a growth-oriented economy, it could be beneficial to invest more in Japanese assets. “With stock markets also performing steadily, we should pursue measures that encourage households and pension funds, including GPIF, to make further investments in Japanese financial assets so that the public can enjoy the benefits of Japan’s economic growth,” the Japanese PM said.
Reuters reported that the government will maintain the formulation that decisions on specific monetary policy tools should be left to the Bank of Japan. Within the government, there is debate on the degree of policy cooperation that is necessary between the BoJ and the government to be put against the principle of central bank independence. According to Reuters, the blueprint in this respect states that “to achieve a strong economy, it is very important for monetary policy to be conducted appropriately to see stable price rises”. Before Parliament, Fin Min Katayama said that there is “no change to the government’s stance that specific monetary policy means fall under the jurisdiction of the BoJ”. The comments at least suggest that the government turns more cautious on any action to interfere with central bank policy. Japanese government bonds and the yen were under pressure early in the trading session this morning, but both closed off the intraday lows. The yield on the 30-y JGB in the end added 2.9 bps, but the 10-y JGB yield eased 2 bps. USD/JPY briefly dropped to the 162.15 area, but at currently 162.35, the yen still trades within reach of the multi-year lows (162.84 area).
