HomeContributorsFundamental AnalysisIn Europe, Spain And France Will Sell Bonds

In Europe, Spain And France Will Sell Bonds

Markets

Yesterday, the ‘aggressive’ flattening trend of the previous days with the very long end outperforming, halted. German yields rose between 1 &2 bp. Overnight, Asian equities stay under pressure. Investors ponder the next steps in the China-US trade conflict. US yields rise around 1 bp as trading restarts after the 4th of July holiday. On European bond markets, the focus is on a rumoured debate within the ECB on the timing of a first rate hike. Some ECB members are said to be unhappy that markets only discount a first rate hike in December 2019. They want markets to take into account that a September or October rate hike are also real options. This debate might have some impact on the (short end) of the European yield curve this morning. Today, the US eco calendar contains ADP labour data, jobless claims and the US non-manufacturing ISM. ADP job growth is expected at a solid 190K. The ISM is expected to ease slightly to 58.3 from 58.6. We don’t see strong arguments for weaker than expected data. However, the reaction/market comments after the manufacturing ISM earlier this week suggest that the reaction might bit a bit more outspoken in case of a negative surprise than in case of a positive one. Later, the Minutes of the Fed June meeting will be published. The dots indicated that 2 Fed members favour a scenario of 2 additional rate hikes this year. Markets will be keen to see how the internal debate on the expected rate path develops. In Europe, Spain and France will sell bonds. ECB members Mersch, Nowotny and Weidmann will speak. Of late, European and US bond stayed well bid as global uncertainty supported some kind of implicit safe have bid. This ‘consolidation at a high level’ might continue going into tomorrow’s US payrolls. Maybe there is some underperformance of EGB’s on the ECB rumours after the close of European Cash trading yesterday.

Yesterday, USD trading developed in thin market conditions. The dollar gained a few ticks on headlines that the PBOC didn’t intend to intervene aggressively to stop the decline of the yuan. However, late in the session, EUR/USD rebounded on headlines that some ECB members want market to give more weight to the chances of a ECB rate hike before December 2019. EUR/USD closed the session little changed at 1.1657. USD/JPY finished at 110.49. Today, US eco data (ADP, ISM) are expected solid, but probably a big positive surprise is needed to trigger further USD gains. If the Fed Minutes would show a rather balanced debate on the rate hike path, this might be slightly USD negative. The fall-out from the ECB debate on the timing of a rate hike might be slightly euro supportive. In a day-to day perspective, EUR/USD might drift a bit higher. Next resistance still stands a 1.1720 and 1.1851.

Yesterday, sterling rebounded further as a good services PMI raised market expectations for an August BoE rate hike. There are few UK eco data today, but BoE’s Carney speaks. The focus will remain on the Brexit debate inside the UK government. For now, it looks that PM May didn’t find a consensus yet ahead of a key cabinet meeting tomorrow. In this context, yesterday’s rebound of sterling might run into resistance.

News Headlines

ECB members have expressed their concerns that investors should see an end-2019 rate hike as too late. They said that a move already in September or October is still a possibility. A hike in the September or October meeting of 2019 is also ECB President Draghi’s last opportunity to hike, since his term ends on October 31.

UK PM Theresa May is facing headwinds on her ‘white paper’ proposal for customs, with her Brexit Secretary David Davis saying it is ‘unworkable’. The proposal will be presented at a cabinet meeting on Friday. The new customs compromise was aimed to bridge the differences between members of her own conservative Tory party.

China’s commerce ministry has said “the US is shooting itself in the foot and is hurting the world in general” with the tariffs on $34bn of Chinese imports that go live tomorrow (6:01 our time). They stated that 59% of the goods on the US tariffs list are produced by foreign companies, US included. It is known that China will take immediate retaliation measures, but interesting will be how fast US President will take action against the Chinese retaliation.

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