Core bonds traded mixed today with German Bunds hovering near opening levels while the US Note future extends technically-induced losses. Bunds initially lost ground as well on stronger-than-expected German PMI’s. However, the EMU composite measure eventually disappointed somewhat. Details showed that the tariffs (threat) starts disrupting supply chains and the Bund recovered losses to trade flat afterwards. Positive risk sentiment on stock markets, amongst other thanks to Alphabet earnings, had no impact. The US Note future lost some ground going into tonight’s start of the refinancing operation. German yields decline by 0.1 bp (5-yr) to 1.3 bps (30-yr). The US yield curve shifts around 1 bp higher. 10-yr yield spread changes vs Germany are barely unchanged with Portugal (+3 bps) and Italy (+5 bps) underperforming.
Contrary to what was the case yesterday, movements in core yields this time failed to provide a clear guidance for FX trading. If anything, US/German spreads moved marginally in favor of the dollar but changes were too small to be significant. EUR/USD dropped temporary to the 1.1655 area early in the session, but the euro changed course after the publication of the EMU PMI’s. The reports (both EMU and countries) were mixed, but a good reading for manufacturing and for Germany as a whole were enough to give some modest support for the euro. Markets apparently feared a bigger setback due to the trade tensions. A good rally on European equity markets was a slightly euro supportive, too. The yen didn’t decline despite this positive risk sentiment. Investors are apparently a bit more cautious on yen shorts ahead of next week’s BOJ policy meeting. EUR/USD hovers in the 1.17 area. USD/JPY is holding in the low 111 area. For now, yesterday’s rise in core/US yields didn’t trigger a sustained USD comeback yet. The picture on the US currency remains indecisive short-term.
Initially, there was no big story to tell on sterling trading today. The CBI orders and confidence data were not too bad and cost pressures are rising. So, the CBI report supports the case for a BoE rate hike next week. At the same time, CBI sees investor reluctance on investments. The CBI data had no noticeable impact on sterling trading. Late in the session sterling gained a few more ticks on headlines that UK PM May will take the lead in the Brexit negotiations. However, the political reaction of Brexiteers to this move is still highly uncertain at this stage. EUR/GBP trades in 0.89 area. The EUR/GBP 0.8968 resistance is clearly left intact. At the same time, there are no sustained sterling gains yet. Cable also gains slightly ground and rises to the mid 1.31 area.
European business confidence declined again in July, according to the drop in Markit Eurozone Composite PMI to 54.3, coming from 54.9 in June. Although the manufacturing component recovers slightly to 55.1 (from 54.9 in June), the drop in the Services component to 54.4 (from 55.2) outweighs the total number.
Turkey’s central bank left its policy rate unchanged at 17.75%. A new hike to 18.75% was expected, due to the acceleration of the country’s inflation (15.39% in June, which is a 14-year high). The unchanged policy rate is seen as proof of President Erdogan’s influence on monetary policy. EUR/TRY immediately gained more than 3%.
The Hungarian central bank left, as expected, its policy rates unchanged. Last month it changed its forward guidance to take a slightly more aggressive approach and hinted that rates will not be kept low for ‘an extended period’. Market reaction is soft and keeps EUR/HUF near 326.