No such thing as calm before the Fed-storm on bond markets today. An uneventful Asian trading session and a rather poor economic calendar suggested a dull/technical trading day in the run up to tomorrow’s Fed meeting. But Draghi decided otherwise. In his introductory speech in Sintra the ECB chair made clear that “in absence of any improvement” in the outlook for growth and inflation, additional stimulus will be needed. He referred to all possible tools but three euro-zone central bank officials said lowering the depo rate would be the most likely initial step. Euro bond rates tanked with the bond rally drawing additional support from weak ZEW investor confidence. The German yield curve bull shifts south with stunning yield changes, varying from -6bps (2y) to -7bps (5y, 10y, 30y), to new record lows. The Swedish and French 10y yield fell below/touched 0% for the first time ever. Peripheral spreads narrow 6bps (Spain, Portugal) up to 13bps (Greece, Italy). Today’s hunger for bonds also lead US yields to decline considerably before pairing some of the losses after Trump said he’ll meet China’s Xi Jinping during the G20 summit. The US yield curve bull flattens with yields -2bps (2y) to -3bps (10y) lower. The US10y yield is extensively testing the 2.06% support.

With markets awaiting tomorrow’s Fed policy decision, ECB president Draghi drove to price action on the (FX) markets today. The ECB president indicated that further stimulus will be needed if the economic outlook doesn’t improve. Both asset purchases and interest rate cuts are possible, but the latter apparently has the biggest chance to be implemented in the near future. EUR/USD tried a technical rebound early this morning, but the pair nosedived from the 1.1240 area to the 1.1185/80 area after the headlines of Draghi’s Sintra speech. The decline was substantial, but markets soon doubted whether/at what pace it should continue. US yields also declined substantially, limiting the relative interest rate advantage for the dollar. US president Donald Trump also reacted very soon as he labeled the (prospect of) more ECB stimulus and the subsequent decline of the euro as unfair. Next question of course remains how the Fed will react. Markets see a rising chance of the Fed taking bolder action than what was recently expected. US politicians, including president Trump, will probably also continue to raise the issue of a (too?) strong dollar in the run-up to next week’s G20 meeting. So, further substantial USD gains-EUR/USD downside isn’t guaranteed yet. EUR/USD is currently trading in the 1.1200 area. USD/JPY hovers in the 108.20 area.

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Sterling trading was driven by UK political uncertainty over the previous days. The Conservative party is holding a second vote on a successor for Theresa May today. However, sterling trading was also captured by the overall market moves in the wake of ECB’s Draghi’s comments in Sintra. EUR/GBP dropped from the 0.8965 area tot the 0.8920/25 area on overall euro weakness. As was the case for EUR/USD, the decline halted rather soon. EUR/GBP is currently trading in the 0.8945 area. Spill-over selling from EUR/USD pushed cable to the low 1.25 area (currently 1.2625). Despite today’s ‘intermezzo’ UK politics and Brexit might soon return to the forefront for sterling trading. Markets will also look out whether the BoE will keep its ‘tightening bias’ at Thursday’s policy meeting.

News Headlines

President Trump denounced Draghi’s hint at more monetary stimulus during his Sintra speech this morning. Trump noticed the immediate euro drop vs. the dollar in the wake of Draghi’s comments and said that it makes it “unfairly easier for them [the EMU] to compete against the USA”.

German ZEW investor confidence disappointed in June. The current conditions component (7.8) declined less than markets expected (6.1) but prospects for the next six months fell to readings seen during end of 2018’s equity market rout (-21.1).


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