Markets:

A dead cat bounce. Today’s price action shows that yesterday’s risk revival was nothing more than a dead cat bounce. We warned not to buy into the thinly veiled market optimism backed by minor gains in the US-Sino trade war. Only a real improvement in eco data could probably trigger a more sustained improvement in market sentiment. This morning’s batch of July Chinese eco data (industrial production, retail sales and fixed asset investments) & the (expected) Q2 German GDP contraction reminded investors that we haven’t reached this phase yet. (US) bond markets and stock markets saw a complete reversal of yesterday’s market moves. European indices lose over 1.5% with the German Dax for example dipping below the neckline of a big double top formation (11 620). US stock market face similar opening losses. Core bonds record impressive gains with US Treasuries outperforming German Bunds. The latter of course already reached atmospheric levels. The US yield curve bull flattens with yields declining by 6.5 bps (2-yr) to 10.7 bps (30-yr). The US 2yr-10yr yield spread is currently flat. The UK yield curve inverted today for the first time since 2008 between these tenors. Yield curves are thus flashing red and heralding recessions ahead. The German yield curve moved in similar fashion with yields up to 4.5 bps (30-yr) lower. Peripheral yield spreads vs Germany narrow by 3 bps to 5 bps.

The single currency tended to outperform somewhat recently during bouts of risk aversion, but that wasn’t really the case today. EUR/USD traded flattish around 1.1175 even if the dollar lost again quite some interest rate support. The trade weighted dollar generally didn’t go nowhere (stabilizing near 97.75). USD/JPY did return most of yesterday’s gains, falling back below 106, but maintaining the key 105 support area. EUR/CHF declined from 1.09 towards 1.0850. Sterling again failed to profit from eco numbers. Following yesterday’s strong labour market report, the ONS today published higher than expected inflation readings. EUR/GBP changes hands around 0.9265, a whistle away from opening levels.

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News Headlines:

UK headline inflation unexpectedly returned above the Bank of England’s 2% inflation target in July (2.1% Y/Y vs 1.9% Y/Y expected). Core inflation accelerated as well to 1.9% Y/Y. The Augustus BoE inflation report suggested a cooling down inflation towards 1.6% by the end of the year. The increase was driven by clothing & footwear, financial services and games, hobbies and accommodation services.

German economy minister Altmaier said in an interview with Bild that Q2 GDP data, released this morning (-0.1% Q/Q) are a wake-up call and a warning sign. Germany needs intelligent policies for growth, including easing the burden on SME’s, cutting corporate tax and the complete withdrawal of the Solidarity Tax. Chancellor Merkel earlier opened the door for a growth package to help the sputtering economy.

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