Weak German ZEW investor sentiment and higher than expected US core inflation readings sparked intraday volatility yesterday. However, all these moves turned pale after investors received some positive news on the USSino trade front. China first confirmed to restart negotiations by phone in two weeks’ time and the US administration later delayed some of the planned September 1st tariffs against China to December 15. The Chinese Commerce Ministry later said that the country agreed to nothing in return, but this morning’s stronger than expected fixing of the yuan might suggest they appreciate the “sign of good faith”. Anyway, the trade headlines caused of positive turn in overall market risk sentiment, with stocks, US yields and the dollar all profiting. US Treasuries underperformed German Bunds. US yields added 9.9 bps (3-yr) to 3.1 bps (30-yr) on a daily basis. The German yield curve still bull flattened with yields losing up to 3.6 bps (30-yr). The German 10-yr yield closed below -0.60% for the first time ever even if European stock markets rebounded over 0.5% as well. Gains for US indices exceeded 1.5%. The dollar relived with USD/JPY bouncing away from the key 105 support area. The pair managed a close of 106.74. EUR/USD fell to 1.1171. EUR/GBP eventually ended at 0.9264. The risk rebound supported sterling, something which a strong UK labour market report earlier on the day failed to do. 10-yr yield spreads vs Germany ranged between -2 bps and +1 bp with Italy (-7 bps) outperforming. BTP’s might get some more short term reprieve after yesterday’s political uniting against Lega’s Salvini, but we believe that they aren’t out of the woods yet. August 20 is the next key date with a possible no confidence vote against PM Conte.

Asian stock markets gain around 1% this morning with the trade reprieve masking very weak Chinese July eco data. Core bonds do grind higher. German Q2 GDP growth as expected contracted by 0.1% Q/Q. Today’s eco calendar is thin with only (outdated) EMU industrial production data. They are expected to confirm the economic slump in the euro zone (-1.5% M/M), but shouldn’t impact trading. UK inflation numbers are interesting, but, as with labour data yesterday, will be overshadowed by the Brexit debate. Risk sentiment will remain the main market driver. We fear that the risk rebound won’t have very strong legs unless global eco data start improving significantly. We are therefore hesitant to buy into the risk rally.

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News Headlines

Chinese eco data for July, released this morning, printed ugly. They show that the Chinese economy has difficulties to stabilize. Industrial production rose by 4.8% Y/Y, the weakest growth since 2002. Retail sales slumped to 7.6% Y/Y with an ongoing contraction in auto sales. Fixed asset investments slowed to 5.7% Y/Y. All outcomes were below consensus.

Italy’s opposition parties and the ruling five star movement joined forces in the Italian Senate yesterday against vice PM Salvini’s Lega. They voted down his request for an immediate (today) vote of no confidence in PM Conte’s administration. Conte will now address the senate on August 20, after the Ferragosto public holiday, which could lead then to Salvini’s hoped confidence vote.

The Telegraph reports that UK House of Commons Speaker John Bercow said that he well refuse to allow PM Johnson to suspend the UK Parliament to secure Brexit.


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