Markets

Sterling’s slide was extended today. EUR/GBP took out 0.9079/0.9086 resistance (recent high/50% retracement of March/April decline). Technical selling accelerated the queen’s money downfall, lifting EUR/GBP towards next resistance at 0.9184 (62% retracement). A real test didn’t occur yet. Investors aren’t impressed by UK PM Johnson’s promise to “build, build, build”. Tomorrow he’ll address the nation, followed by a summer statement from Chancellor Sunak which is expected to contain fresh stimulus measures (focus on infrastructure spending). The huge spending bills obviously come at a price. The UK Debt Management Office announced that UK bond issuance is set to total £275bn between April and August. Over this 5 month’s period, the DMO will already exceed the previous record issuance of fiscal year 2009-2010 (£228bn). The DMO only extended its funding plans by one month (earlier guidance for April – July: £225bn), reflecting the fact that the government’s financing requirement for the fully year remains subject to significant uncertainty given that the extent and duration of the economic impact of COVID-19 and the associated policy support provided by the government continue to evolve. The wall of supply didn’t hurt UK Gilts. On the contrary, they slightly outperformed German Bunds and US Treasuries in a daily perspective. The German Finanzagentur announced planned Q3 bond sales as well. They tripled their earlier estimate to €146bn (bonds: €74bn). Q4 sales will at most be equivalent to Q3, but as in the UK too much uncertainty lingers to put forward specific numbers. Germany will sell its first green bond in September (10y) via syndication, with another one coming in Q4 (likely 5y). German Bunds underperformed US Treasuries on the supply announcement. The German yield curve bear steepens with yields 1.1 bp (2-yr) to 2.6 bps (30-yr) higher. The US yield curve steepens marginally with daily changes ranging between -0.8 bps (5-yr) and +0.9 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps.

Supply announcements shared attention with risk sentiment. European stock markets narrowly trade above water despite another record breaking day of COVID-19 infections. US stock markets opened on a positive note as well after last Friday’s beating with Nasdaq underperforming (Facebook). The start isn’t really convincing though, suggesting tough times ahead. We eye 2954 support in the S&P 500. A move lower would end the rebound since mid-March. The US dollar continues to struggle. Trading dynamics are shifting towards softer US equities, US yields and US dollar with second waves of infections blazing through the country and interfering with planned reopening strategies. EUR/USD rises to the high 1.12 area today. The trade-weighted dollar slides to the low 97-area.

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News Headlines

The European Commission’s economic confidence indicator recovered to 75.7 from 67.5. That’s less than expected (80) and still well below the long-term neutral average of 100. Economic sentiment improved in all sectors. Services and retail printing the strongest rebound (though pessimist still outweigh optimists) should come as no surprise as they were hit the hardest by the pandemic.

German HICP inflation rose a tad more than expected with 0.7% m/m (0.8% y/y) in June vs. 0.4% m/m (0.6% y/y) expected. Regional readings’ details showed a particularly strong contribution from leisure and entertainment (in turn supported by holiday packages) which more than offset the drag by clothing and shoes.

China will impose a visa ban on Americans who “behave badly in Hong Kong affairs”. The move comes after the US State Department took a similar action against Chinese officials. While largely symbolic, the Chinese retaliation is another sign of worsening tensions between the US and China over their handling of the pandemic and the ongoing trade war.

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