Markets

Trading developed under lower-than-normal volumes today. US cash markets are closed in observance of (early) Independence Day, leaving European investors on their own. There was little to no guidance from the eco calendar. Eurozone final PMIs (services, composite) were one point better than the flash reading but remain in contraction territory. The resignation of French PM Edouard Philippe as part of a major cabinet reshuffle (see below) caught some headlines and dampened investor sentiment somewhat during an otherwise uneventful session. A Bloomberg report later added to the cautious risk-off. The news agency flagged disagreement among ECB policy makers over how much the emergency bond buying programme (PEPP) should remain skewed to more vulnerable countries such as Italy, referring to multiple conversations with ECB officials. The more hawkish governing council members, including Bundesbank’s Weidmann, insist the programme should be temporary or at least adhere to some rules such as the capital key if it is turning into a long-lasting stimulus tool. European stocks face marginal profit-taking going into the weekend after soaring almost 3% yesterday. Losses range from 0.5-1%. The German Bund eked out some gains during early trading hours but failed to retain most of them. German yields trade unchanged, as do most peripheral spreads. Italy is a noticeable underperformer however, widening 5 bps to core in a clear sign investors picked up the BB report. France’s spread is virtually unchanged following the political developments.

FX markets’ trading unfolded in a similar uninspiring fashion. The dollar enjoyed some risk-off bids, rising against most majors. EUR/USD developed a choppy pattern within a downward daily trend channel. The pair is currently filling bids in the 1.123 area, slightly down from 1.124 at opening. DXY is the exact mirror image, advancing from 97.2 this morning towards 97.3. USD/JPY is going nowhere around 107.5. Sterling wasn’t really concerned about the EU/UK trade talks ending a day earlier than planned yesterday and also remained rather stoic today. EUR/GBP hovered near opening levels in the low 0.90 area. Cable trades unchanged. Brexit talks will continue in the UK next week. Both parties acknowledge differences on key issues still exist but hold confidence in reaching an agreement.

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News Headlines

French President Macron announced Jean Castex, a relatively unknown civil servant, to become Prime Minster of a new  government. The nomination followed after resignation of Edouard Philippe. The move is seen an part of a reshuffle aimed at reviving President Macron’s presidency ahead of the 2022 next presidential election. The move follows a poor performance of Macron’s ‘La République En Marche‘ party at municipal elections last week.

Portugal’s Parliament approved a supplementary budget from the Socialist minority government today. The new budget aims to increase spending by € 4.3 bln to help the economy recovering from the corona crisis. The new spending plan includes measures to support job creation, employment training, a new furlough scheme, tax discounts and tax delays. The budget also provides an additional € 500 mln for the health service.

Inflation in Turkey rose 1.13% M/M and 12.62% Y/Y. Only a more modest rise to 12.00% was expected. Core inflation also rose at a faster than expected pace (11.64% Y/Y). The rise in inflation will make further rate cuts of Turkey’s central bank even more unlikely/difficult. Last week, the central bank unexpectedly held rates steady at 8.0% while a 0.25 rate cut was expected, citing risks for higher inflation. The Turkish lira hardly reacted today’s inflation data. EUR/TRY is holding a tight range in the 7.70/71 area.

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