Markets

The easing tensions on China and the equity rebound had remarkably little impact on core bonds. Core German and US bonds initially lost a few ticks, but the damage was negligible. Later in the session, yields even reversed the initial rise as US equities struggled to join the broader risk rally. Yields changes for both German and US bonds are mostly less than 2 bp across the yield curve. The improved risk sentiment also caused a small narrowing of intraday EMU-spreads versus German, but the move petered out later in the session (-3 bp Greece). Italy even reversed earlier gains (currently spread +2 bp). After all, it was an uneventful session on the major bond markets.

Today, the dollar made a small step backward. PBOC officials indicated that the Bank is monitoring recent FX volatility. They also reiterated that Bank intends to keep the yuan basically stable. Markets considered this a warning signal which may translate into more decisive action if the yuan sell-off were to continue. The yuan rebounded as did global equities. Improved risk sentiment trimmed USD buying. However, for now, the correction of the USD currency remains limited. The trade-weighted dollar eased to trade in the 94.60 area. EUR/USD trades in the 1.1650 area. The easing of political tensions in Germany was maybe also a marginal euro supportive. Trading volumes will soon ease this afternoon as US investors prepare for an early market close ahead of tomorrow’s 4th of July Holiday.

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Today, sterling rebounded after being in the defensive of late. The move started after hawkish comments from BoE MPC member Saunders. He said that any rate hikes will be limited and gradual. Still, he indicated that rates may need to rise faster than markets currently expect. He also downplayed the poor UK Q1 growth performance (effect of bad weather). Saunders assessment shouldn’t come as a surprise as he already voted for a rate hike at the June policy meeting. Even so, comments triggered a comeback of sterling, both against the dollar and the euro. The UK construction PMI was also slightly stronger than expected rising from 52.5 to 53.1. EUR/GBP traded in the 0.8860 area this morning and declined to the 0.8830 area. Cable tested in the 1.32 big figure. However, this move was also partially due to a less buoyant sentiment on the dollar than was the case of late.

News Headlines

Sweden’s central bank kept its policy rate at -0.5% as expected. The Riksbank also left its policy guidance unchanged indicating that a first rate hike toward the end of 2018 remains possible. The Swedish crown strengthened after the publication of the policy statement. Markets apparently expected  the ECB’s ‘lower for longer’ interest rate guidance and global uncertainty could have pushed the Riksbank to ease its interest hike guidance as well.

The Turkish lira declined another 1.5% against the euro (EUR/TRY: 5.44), after data showed that the country’s inflation rate has jumped sharply. The consumer price index rose 15.4% in June (YoY), compared to 12.2% in May.

Chinese central bankers said that current yuan weakness is due to rising uncertainties, rather than intended guidance of the central bank. The PBOC indicated not to have any intentions to use its currency as a weapon in the trade conflict with the US.

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