Sunset Market Commentary

Markets

Guided by some kind of ‘no news is good news’ motto, markets show some further relieve as the US and Iran didn’t exchange any additional military strikes since Friday. The path toward restoring a (lasting) (free?) passage of traffic through the Strait of Hormuz and/or the Bab-el-Mandeb Strait probably remains a complex procedure. Even so, markets at least again see the glass a bit more half full rather than half empty. The Brent oil price temporarily dropped below the $90 reference (currently again $91). In similar move, the Dutch TTF gas reference contract also falls to €59.75 p/Mwh to be compared with peak levels at €64 end last week. The energy momentum trade to some extent spills over to core interest rate/bond markets. US yields are easing between 1.5 bps (2-y) and 3.5 bps (30-y). German bunds slightly outperform (yields declining 3-4 bps across the curve). However, in broader perspective today’s move doesn’t profoundly change the technical picture after recent (protracted) rise in yields. At best, the test of recent (ST or even multi-year) peak levels has been put on hold. Especially US money markets see this decline in oil prices (even after softer than expected US Juni CPI data), as not enough to extinguish the debate on a Fed rate hike as soon as Wednesday (still +/- 33% discounted). In EMU, the two year swap yield struggles to return below 3.0%. ECB Chair Lagarde at last week’s press conference suggested the possibility that another MoU or other good news from the conflict in the Middle East might not have to same positive impact of previous announcements (‘once burned, twice shy’). Maybe EMU interest rate markets currently apply this kind of thinking as visibility remains low. ECB’s Kazimir at least also advocated that some further tightening is needed, even if the situation ‘improves somewhat’. Stocks get some relief (Eurostoxx 50 +0.9%, S&P 500 +0.8%, Nasdaq +0.9%). However, especially for US equities (and in particular for the Tech sector) question remains what will be the dominant factor: A milder global context or investors’ assessment on the sustainability of the AI driven rally? (Cf Microsoft, Meta, Apple and Amazon results later this week, amongst many others).

On FX markets, the dollar quite easily resists current ‘risk rebound’. DXY at 101.4 keeps the June top (101.8) within reach. An initial EUR/USD attempt to regain the 1.14 barrier this morning failed (currently 1.1385). At 163.7, USD/JPY is also only a whisker away from its multi-year/decade top. Investors apparently stay cautious on holding USD shorts going into a more unpredictable Fed policy meeting. Contrary to Friday, sterling this time doesn’t profit from the milder global context. EUR/GBP even gained slightly to trade near 0.855.

News & Views

The July Business Climate Index of the German IFO institute showed a further improvement in Business Sentiment in the country. The Business climate index climbed from 85.7 to 86.6. The rise was due to a substantial improvement in the expectations component (from 84.3 to 86.7). Companies were a bit less satisfied with their current business performance (86.5 from 87.0). Even so, Ifo analyzes that companies have become less pessimistic despite the uncertain situation in the Persian Gulf. Sentiment improved in the four sectors reported (Manufacturing, services, trade & construction). Especially the index of the manufacturing sector rose noticeably (balance from -12.5 to -9.6). In manufacturing, it was also expectations that drove the improvement. Demand picked up, and material shortages were reported to have eased. In the service sector, business climate also improved (balance -4.4 from -5.1). Service providers were also less skeptical about the coming months. The trade subindex balance improved from -26.7 to -23.4. Even construction sentiment picked up (-20.4 from -22.8) as fewer companies reported a lack of orders.

According to the distributive trades survey of the Confederation of British Industry (CBI), retail sales volumes fell at a markedly slower pace in the year to July with the indicator rising from -54% to -26%. Retailers still judged July’s sales below seasonal norms, though also to a considerably lesser degree than last month (-18 from -40). Sales are expected to fall at a similar pace next month as was the case in July (-26%) and are set to fall short of seasonal norms to a greater extent (-29%). Wholesale sales volumes were broadly unchanged in the year to July (+2% from -20% in June), ending a run of 25 months of decline. However, wholesalers expect sales to fall again next month (-7%). CBI economist Martin Sartorius commented that “Retailers reported that the ongoing sales downturn lost steam in July, but a recovery still looks some way off as gloomy sentiment and elevated cost pressures weigh on activity.” CBI also said it looks forward to broader business rates reform from the new Prime Minister to address key constraints on investment and growth and also called on the government to take further action to tackle rising labour costs.