Yesterday, the US and German yields curves flattened further even as absolute yields changes were again limited. European and US equities succeeded a nice rebound. The impact from the trade tensions on equities faded. Rumours on a potential US- EU deal on automobile tariffs reinforced the equity rebound. Still, the impact from equities on bonds was again limited. US data (ADP and ISM) were solid but had also no lasting impact on bond trading. In the minutes of the June meeting, the Fed remained positive on current economic development even as trade tensions are becoming a bigger risk. The scenario of the Fed raising the policy rate to or slightly above the neutral level in 2019/20 remains valid. The flatting of the US yield curve continued. At the end of the day the US 2-y yields rose 2.5 bp. The 30-y declined 1.4 bp. The German yields curve showed a similar picture (2-y +1.1 bp, 30-y -1.9 bp). Today, the next stage in the US-Sino trade war and the US payrolls will probably drive global markets’ trading. US import tariffs on $ 34 bln of Chinese imports were activated this morning. At the time of writing, the reaction from China wasn’t published yet. Asian equities are trading volatile, but for now the reaction isn’t too bad. Most indices, including China, are reversing earlier losses. The US 10-y Note future declines slightly. There are few eco data in Europe. In the US, the payrolls are expected to show net job growth of 195 000 (223 000 in May). The unemployment rate is expected unchanged at 3.8%. Average hourly earnings are expect at 0.3% M/M and 2.8 % Y/Y (was 2.7% in May). We don’t see specific reasons for a negative surprise. However, earlier this week, other solid US eco data also a limited impact on US bond markets. So, there is probably a very strong report needed (including a positive surprise in AHE) to block the recent (bull) flattening trend of the US yields curve.

Yesterday, EUR/USD profited from the debate/rumors that the ECB kept the door open for a September 2019 rate hike, earlier than what the market discounted after the June ECB meeting. US eco data (APD and ISM) confirmed a good US eco momentum but didn’t help the dollar much. EUR/USD even tested the 1.1720 resistance, but a break didn’t occur. The gains in USD/JPY were small given the risk-on sentiment. This morning, EUR/USD shows no clear trend even as Asian markets react in a constructive way to the implementation of US import tariffs. However, the next steps in the trade conflict remain a wildcard for global risk sentiment and for EUR/USD trading. As is the case for US yields, the payrolls will probably have to be really strong to trigger broad USD gains. In this context, a retest (or even a break) of the EUR/USD 1.1720 resistance is possible. Next important resistance comes in at 1.1850.

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Yesterday, sterling profited temporary from a positive assessment of BoE Carney on the UK economy. However, the gains could not be sustained. EUR/GBP even rebounded back to the 0.8850 area. Today, UK PM May will try to reach a government consensus on a detailed Brexit plan/strategy. Latest indications suggest that a consensus won’t be easy. The meeting clearly is a binary risk. As long as there is no workable plan, we assume sterling to remain weak.

News Headlines

US President Donald Trump has imposed his announced tariffs on $34bn of Chinese imports, as expected. China announced earlier that it would retaliate immediately, but has not acted so far. In the case of retaliation, Trump said to target more Chinese imports starting with $16bn, followed by another $200bn and $300bn.

Oil prices fell yesterday after US government data showed an unexpected rise in crude oil stockpiles. US crude stockpiles rose 1.3m barrels last week. A 3.5m barrel drop was expected. Brent oil price decreased to $77.25 a barrel.

Japan’s household spending decreased 3.9% in May (YoY), the biggest drop in two years and the fourth straight month decline. Economists forecasted a decline of only 1.5%, but according to the ministry of internal affairs rainy weather kept consumers away from the shops.


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