Geopolitics rocked markets yesterday. An escalation of anti-government protests in Hong Kong caused HK airport to cancel all flights. The persisting demonstrations are expected to have economic repercussions as well. Anyway, in absence of other eco data/events, it covered global markets with risk aversion. Core bonds excelled with a significant outperformance of US Treasuries. The latter received an additional boost during US trading hours as stock markets slid up to 1.5%. The US yield curve bull flattened with yields down 6.3 bps (2-yr) to 12.7 bps (30-yr). The US 2-10yr yield spread currently trades at 6 bps, which is the flattest since June 2007. An inverted yield curve (which already is the case for the 3-month/10-yr spread) has been an omen for a recession the past 7 downturns. The latest “false” signal dates back to 1967. The market currently attaches a more than 50% probability to three additional, subsequent, rate cuts by the Fed even if FOMC Chair Powell stressed at the July meeting that it wouldn’t be the start of a cutting cycle. Changes on the German yield curve varied between -1.1 bp (5-yr) and -2.5 bps (30-yr) yesterday with a new record closing low for the 10-yr (-0.597%). 10-yr yield spread changes vs Germany ranged between -3 bps (Portugal) and +4 bps (Greece) with Italy outperforming (-9 bps). Italian BTP’s recovered part of Friday’s losses as Fitch saved the axe on the country’s BBB rating and with Italian parties rumoured to try to build a grand coalition to fend off snap elections. The Italian Senate will this afternoon timetable a motion of no confidence against PM Conte after failing to do so yesterday

The Japanese yen (USD/JPY 105.30 close) and Swiss franc (EUR/CHF 1.0869) were typical winners on FX markets with EUR/USD staging an intraday turnaround higher once the HK trouble spread. The currency pair eventually closed nearly unchanged at 1.1214. EUR/GBP initially fell prey to some profit taking, but also ended virtually flat (0.9286) after visiting the 0.9250 area. Also noteworthy was the Argentine peso’s 15% drop after presidential primaries showed a bigger than expected win for the opposition candidates.

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Asian stock markets extend losses this morning with Japan (returning from public holiday) and Hong Kong (for obvious reasons) underperforming. Core bonds tread water though with yesterday’s FX winners ceding some ground as well. Today’s EMU eco calendar contains German ZEW investor sentiment. Both headline and expectations components are expected to extend their decline. Germany is facing the threat of an economic recession with tomorrow’s Q2 GDP numbers expected to show a 0.1% quarterly drop. The US calendar includes NFIB small business optimism and CPI figures. The market reaction to the eco releases is probably asymmetric, with investors ignoring better than expected prints, but buying/selling into the recession story in case of weaker outcomes. We therefore maintain our positive bias for core bonds, EUR/USD and EUR/GBP (labour data due today).

News Headlines

The Portuguese government declared a civil order to ensure that truck drivers deliver enough fuel to stop airports and gas stations from running dry. Truck drivers started a strike at midnight on Monday to protest against low wages. A similar strike lasted for 4 days in April. The protests occur in the run-up to the October 6 general election.

The Irish consumer sentiment fell to a 56-month low in July (85.5 from 90.9). The notably increased risk of a no deal Brexit coupled with some threatening domestic commentary on Irish economic prospects prompted a gloomier assessment of the ‘macro’ outlook and household finances on the part of consumers.

US national security advisor John Bolton said that the US would enthusiastically support a no-deal Brexit if that is what the British government decided to do. He promised that Washington was willing to work fast on a US-UK free trade agreement after a successful Brexit.


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