Rates: Core bonds rather resilient despite improvement risk sentiment
Core bonds oscillated near opening levels yesterday despite US CPI (2.9% Y/Y), a further improvement in risk sentiment and bullish economic comments of Fed Chair Powell. Q2 earnings and risk sentiment probably remain the key market theme today. The US S&P 500 tests final resistance ahead of the all-time high.
Currencies: Dollar holding strong even as risk sentiment improves
Yesterday, the dollar remained will bid even as demand for safe haven assets eased. A further rise in the US CPI and rising short-term yields supported the US currency. This trend can continue today. Sterling didn’t profit from the publication of the Brexit White paper as the final result of the Brexit process still faces plenty of political hurdles
The Sunrise Headlines
- After Wednesday’s dull performance, American bourses ended in green yesterday, with the Nasdaq (+1.4%) outperforming its peers (+0.9%). Asian equity markets currently extend gains. Japans’ Nikkei index is leading (+2%).
- US president Trump lashed out at May’s Brexit proposal, saying it “will probably kill” any UK-US-trade agreement as the US under such a Brexit deal “would be dealing with the EU instead of dealing with the UK”.
- Chinese exports/imports in June rose 11.3%/14.1% YoY, resulting in a $41.61bn trade surplus. The June trade surplus with the US climbed to $28.97bn, the highest since 1999, underlining the US-China trade conflict.
- After China on Tuesday, the US signalled they were open to resuming talks over trade. US Treasury Secretary Mnuchin said that “to the extent that China wants to make structural changes, I and the administration are available” for talks.
- Fed Chair Powell showed confident about the US economy, Tax cuts and spending increases could give a “significant” boost to the economy for the next 3 years at least. Trade poses a risk with stagflation the worst case outcome
- Germany declined to sign off the €15bn final aid payment to Greece that would end the country’s 8 yr bailout regime after the Greek government postponed a planned tax increase on islands that were hit by migration flows.
- US Michigan’s consumer sentiment is published today. The Fed releases its semi-annual monetary policy report to Congress. JP Morgan Chase, Wells Fargo and Citigroup kick off the Q2 earnings season. Fed’s Bostic speaks
Currencies: Dollar Momentum Improves Going Into US CPI Release
USD stays strong even as risk sentiment improves
Yesterday, calm returned to global markets. Tentative signs that the US and China might return to the negotiation table reversed Wednesday’s risk-off trade. Still, the risk rebound didn’t hurt the dollar much. Interest rate differentials widened slightly in favour of the USD. US inflation rose further north of 2% reaching 2.9% Y/Y. The US 2-y yield nears the cycle top. EUR/USD finished little changed at 1.1672. USD/JPY extended Wednesday’s upside break and closed the day at 112.55. This morning, most Asian equities mostly join the risk rebound with China still underperforming. Yesterday’s global FX ‘trends’ remain more or less in place. The CNY is holding rather soft (USD/CNY 6.67). The dollar remains well bid. EUR/USD is changing hands in the 1.1655 area. USD/.JPY gains a few more tics (112.70 area). Overnight, Fed Powell remained optimistic on the US economy and saw no reason for the Fed to change to path of gradual policy normalisation. Today, US import prices and Michigan consumer confidence will be published. Markets will also keep an eye at the first bank earnings. Michigan confidence is expected little changed at a high level (98 from 98.2). Corporate earnings are expected strong. Interesting to see firms forward guidance and the subsequent market reaction. Markets apparently assume that the US economy is rather resilient for impact of the trade war. In this context, positive US earnings and US equity outperforms shouldn’t be too negative for the dollar. Yesterday, we indicated that the day-to-day momentum of the USD improved. This is still, the case. However, in somewhat broader perspective we keep the working hypothesis that the EUR/USD 1.15 range bottom is solid. USD/JPY confirmed the break 111.40 with further gains.
Yesterday, the publication of the White Paper on the UK Brexit strategy didn’t change fortunes for sterling in any profound way. The plan aims for a relatively soft Brexit (at least for goods) but political hurdles remain high. Sterling regained a few ticks against the euro, but the gains could not be sustained. Overnight sterling even lost slightly further ground after a press interview of Donald Trump. He said the soft Brexit plan could kill a trade deal with the US and supported Boris Johnson in his political battle with May. For now, we still don’t see a trigger for a sustained GBP comeback. More sideways EUR/GBP trading might be on the cards.
EUR/USD: dollar holding strong even as risk sentiment remains constructive
