With few data in the US and Europe, trading yesterday was still driven by the swings in global risk sentiment. China still outperformed, but this time there was no spill-over on European markets anymore. Europe equities opened in red and sentiment remained sluggish throughout the day. European indices closed about 1.0% lower. US markets initially found no clear directional pattern, but gradually tech stocks again to captured a better momentum with the Nasdaq setting another record close (+1.44%). The S&P and the Dow respectively gained 078% and 0.68%. The intraday swings in equites also filtered through into price pattern for US bonds. Bonds initially remained well bid. The auction of $29 bln of US 10-y notes met solid investor demand (bid/cover 2.62) to print at a record low yield of 0.653%. Later in the session, a rebound in equities still caused a modest bear steepening of the US curve with yields rising between 0.2bp (2y) and 2.5 bp (10 & 30y). German bunds outperformed and the curve flattened (30y -2.6bp). The dollar opened strong, but came again under pressure from the start of US trading. The EUR/USD intraday rebound even was quite impressive, suggesting both USD softening but at the same time underlying euro strength. EUR/USD closed at 1.1330 compared to intraday lows in the 1.1265 area. USD/JPY also followed the broader late session USD decline. The yen gained despite the risk-on. USD/JPY closed at 107.26. EUR/GBP hovered around the 0.90 pivot. The new fiscal stimulus as announced by UK Fin Min Sunak initially didn’t help sterling, but the late session risk-on finally supported sterling and caused EUR/GBP to close below the 0.90 level (0.8985).

This morning, Asian equities are following the lead from WS with broad-based gains, China still outperforming. Chinese price data were close to expectations (inflation 2.5% Y/Y). Japan underperforms. Japan May core machine orders (+1.7%) were better than expected, but a rise in Tokyo corona infections maybe weighs on sentiment as does a rather ‘strong’ yen (USD/JPY 107.25). The dollar remains in the defensive. USD/CNH dropped below the 7 handle. The TW dollar (DXY) declined to the 96.30 area. EUR/USD (1.1360) is pushing hard to break the 1.1350 resistance.

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European data are again few today. In the US, the weekly jobless claims are interesting. A modest decline from 1.427 mln to 1.375 mln is expected. Last week , the decline in claims was disappointing. Data often aren’t the main driver for trading. Still we are keen to see the reaction, in particular in case of another unconvincing outcome. Will markets see it as an indication that the rise in infections is slowing the recovery? US bond investors will look also look out for a $19 bln 30-y US bond sale. US auctions this week went well and we don’t see a reason why it should be different this time. For now, core bonds show resilience even in case of a mild risk-on. US and German 10-y yield recently trend gradually lower in the established ranges and for now there is no reason to row against the tide. On the FX markets, the technical set-up for EUR/USD looks quite constructive. The 1.1260 area proved a solid support and helped to develop a buy-on-dips pattern. A sustained break of 1.1350 would open the way to the 1.1422 intermediate top. The March top stands at 1.1495. Sentiment on sterling improved slightly of late. EUR/GBP tries to break below the 0.90 reference, but the move lacks conviction. The additional fiscal support announced yesterday at least was no game changer for sterling trading.

News Headlines

Boston Fed Rosengren thinks that virus outbreaks in the coming months are likely and will spur demand for the Fed’s $600 bn Main Street Lending Programme. MSLP was announced in March but only became operational in June as the Fed struggled to hammer out the terms but draw little interest, banks say. Rosengren hinted that the programme could be extended beyond its current September expiration date.

Chinese consumer prices rose 2.5% y/y but still declined on a monthly basis (-0.1% m/m) in June. Still, disinflationary pressures eased compared to May. Food prices remain the main driver of inflation, surging 11.1% y/y. China’s factory prices declined at a slower pace of -3% y/y in June (-3.7% in May) thanks to a recovery in commodity prices, including oil.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.


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