Sunrise Market Commentary

Markets

Friday brought some, maybe unexpected relief to global (energy) markets, even as US president Trump end last week still threatened to scale up military action against Iran. Houthi militants attacking Saudi targets and complicating Saudi Arabia’s oil exports through the alternative route via the Bab-el-Mandeb strait only added another layer of uncertainty. Still, energy markets took a breather after recent sharp rise in oil and gas prices. (Brent) oil eased back below the $100 p/b mark (close $96.7 p/b). The Dutch TTF gas reference held most of its recent rise near €62.6 p/Mwh). Markets apparently reached some kind of short-term point of evaluation. The ‘softening’ also spilled over to interest rate markets. US yields eased between 2.6 bps (5-y) and 0.2 bps (30-y). German yields declined between 5.6 bps (2-y) and 1.6 bps (30-y). Given the permanently changing geopolitical narrative and the outlook for energy supply & prices, eco data these days tend to have become a bit outdated upon release. Even so, the July PMIs at least suggested that not only the US economy (composite PMI 53.6 from 51) but even the EMU (composite PMI 51.9 from 50.0) were in fairly good shape at the onset of de most recent flaring up of the conflict in the Middle East. Price pressures, while easing a bit in EMU, still remained very elevated in the US with worsening supplier delays and intensifying price pressures both on the supply side and on the selling side. Something to keep a close eye on for the Warsh Fed when it meets later this week. The softer tone on energy and bond markets also gave equities some breathing space (EuroStoxx 50 +1.14%, S&P 500 +0.05% but Nasdaq still losing 0.64%). On FX markets, the dollar still held the upper hand. USD/JPY jumped to just shy of the 164 big figure. EUR/USD held below 1.14 (close 1.137). Sterling also got some reprieve after recent correction, supported by a milder global context and a set of better than expected domestic data (strong June retail sales at 1.0% M/M and 4.2% Y/Y, composite PMI at 52.1 from 49.3).

This morning, markets are trying to find out the meaning of the apparent ceasefire as the US and Iran refrained from military actions against each other this weekend. This suggests some new diplomatic action even as the nature and level of any talks remains highly difficult to assess. Still, markets continue to see some good reason to build on Friday’s easing. Brent oil this morning trades near $92 p/b after touching $100+ levels end last week. US yields are softening about 4 bps across the curve this morning and such a move might be copied on European markets. The dollar is ceding some ground (DXY 101.15, EUR/USD 1.14, USD/JPY 163.6). The eco calendar today contains US durable goods orders (headline expected +1.8% M/M) and German IFO business confidence (expected 86.0 from 85.6), but these data are no game-changers. The US Treasury later today will sell $69 bln of 2-y Notes and $70 bln 5-y notes. In the run-up to Wednesday’s Fed policy decision, the debate on the timing of a potential Fed rate hike will continue. On the back of current decline of the oil price, markets are slightly scaling back the probability of a Fed rate hike this week to 30%-35%. Aside from the Fed policy decision, the Bank of England will hold a regular policy meeting on Thursday. The Bank of Japan decides on its policy rate on Friday. For both, markets expect no change, but they will keep a close eye at the economic update.

News & Views

According to the Confidence indicator of the National Bank of Belgium business confidence in the country maintained the positive momentum seen since May. The overall smoothed synthetic curve, which reflects the underlying economic trend, showed a slight further upturn from -12.4 to -11.9. The business climate has improved in business-related services for the third consecutive month (-3.8 from -7.4). It remained almost unchanged in the manufacturing industry (-15.5 from -15.7) but has weakened slightly in the building industry (-5.0 from -4.2) and the trade sector (-10.8 from -9.3). In the business-related services sector, confidence has risen for the third consecutive month, as expectations concerning future activity and market demand have strengthened. The assessment of current activity is also more positive. In manufacturing demand expectations have improved significantly. Assessments of total order books are also more positive, but stock levels are considered to be higher than normal and business leaders expect to employ fewer staff. In the building industry, some of the optimism seen in recent months has been lost. Capacity utilization rate in the manufacturing industry has fallen for the third consecutive quarter, from 76.1% in April to 74.6% in July.