• European equities are showing gains of around 1%. American indices are joining the positive momentum. Major US indices start the quarter with gains of about 0.5% Trading volumes are light before Tuesday’s US 4th of July holiday. The dollar strengthened as positions are set ahead of key US data later this week.
• Average unemployment in the Eurozone held at 9.3% in May, its lowest level since 2009, as the number of people who registered as jobless fell by 5,000 in the month. It was the weakest monthly performance of the year.
• IHS Markit’s Eurozone manufacturing PMI posted another bumper month of activity with the overall index hitting 57.4 in June, its best level since April 2011 and up from the flash reading of 57.3 and the 57 in May. This makes the quarterly performance the best in over six years.
• The UK June manufacturing PMI unexpectedly declined to 54.3 from 56.3 (revised from 56.7) while a stabilisation was expected. Output, order book and employment growth all slowed and positive sentiment slipped to a seven-month low amid reports of uncertainty regarding the political outlook.
• The US manufacturing ISM improved from 54.9 to 57.8. The consensus expected only a rise to 55.3. The rebound was supported by strong orders (63.5) and a rise of the employment component. Prices rise eased more than expected. (55.0 from 60.5).
• German Chancellor Angela Merkel’s party and her Bavarian CSU allies say in election platform that they oppose pooling euro-area debt. They added that they are ready to develop the Eurozone further together with the French government, for instance with the creation of its own monetary fund.
• US Carmakers outsold June estimates in US. Y/Y changes are still negative as base year 2016 was a record year.

Rates

German bonds start the week with cautious gains

After a savage sell-off last week, German bonds cautiously reversed course in technical trading, but only after a shy test of the key Bund support at 161.68/58 (Bund opened at 161.55). The down-leg was exhausted or at least needed a pause. Ahead of the closure of US markets tomorrow, that isn’t a big surprise. The German 10-yr yield virtually touched the key 0.5% yield resistance. The upturn in German bonds wasn’t because of bad news as the final PMI was even marginally revised higher and the unemployment rate was in line with expectations. The corrective movement was visible in other markets too, with equities and the dollar gaining some ground. With all boats rising, we cannot but conclude that the quarter started well. However, it is too early to jump on the current technically inspired rise of "all" assets. Going towards the publication of the key ISM report (after the closure of our report) core bonds are declining marginally.

At the time of writing, the German yield curve flattened slightly with yields down between 1.9 bp (2-yr) and 0.2 bp (30-yr). The US yield curve was little changed (less than 1 bp) with yields marginally up in the 2-to-5-yr sector and slightly down in the 10-30-yr segment. On intra-EMU bond markets, 10-yr yield spread changes are little changed with the exception of Italy/Spain and Ireland whose spreads narrow 1.5 to 2.3 bps.

Currencies

Dollar rebound ahead of ISM

The dollar made a cautious comeback at the start of the new trading week as investors prepared for key US eco data today and later this week. The EMU eco data were strong, but the euro didn’t profit anymore. EUR/USD declined to trade in the 1.1360 area ahead of the key US ISM manufacturing release. USD/JPY changed hands in the 113 area.

Overnight, Asian equities traded mixed. The Japan Tankan business sentiment was stronger than expected. The Caixin China manufacturing PMI also improved slightly. Decent regional data don’t help the yen though. USD/JPY opened slightly in the red on a negative result for PM Abe’s party in regional elections, but reversed the initial loss. A further rise in the oil price and a rise in US yields supported the dollar. USD/JPY returned to the 112.50 area. EUR/USD dropped slightly to the 1.1405/20 area.

The dollar USD momentum improved during the European morning session. EUR/USD dropped below 1.14 handle. Dollar strength prevailed even as the EMU eco data remained strong (manufacturing PMI, EMU unemployment). Investors apparently reduced USD short-going into a series of key US eco data to be published this week, starting with the manufacturing ISM today. Changes on the core bond market were limited. If anything, the US/German spread widened marginally if favour of the dollar. USD/JPY also extended the intraday uptrend and rebounded to the high 112 area. The intraday dollar rebound slowed this afternoon as investors awaited the US manufacturing ISM. EUR/USD traded in the 1.1370 area. USD/JPY held close to the 113-pivot.

Sterling hardly suffers from disappointing PMI

Sterling trading was mostly driven by the price moves in the dollar and the euro. The overall rebound of the dollar pushed cable back below the 1.30 barrier. There was also a small fall-out from the EUR/USD decline on EUR/GBP. The pair dropped to the 0.8760 area. Mid-morning, the UK manufacturing PMI unexpectedly declined to 54.3 from 56.3 (earlier reported as 56.7). A stabilisation was expected. Sterling lost modest ground after the release. EUR/GBP rebounded to the 0.8775/80 area. Cable declined further. The release further complicates the internal debate in the BoE on the need for a rate hike. However, in this respect, the services PMI to be published on Wednesday will probably be more important. EUR/GBP trades currently in the 0.8780 area; Cable is changing hands around 1.2950.