Markets
A muted start of the week yesterday with Summer trading circumstances in full swing. There was little to no guidance from the eco calendar, barring a disappointing August Empire Manufacturing survey. European equity markets drifted. A tech‐inspired rally pushed the Nasdaq on Wall Street to yet another record high however. The S&P500 once again failed to take out its February all‐time high. Core bonds gained with the German Bund outperforming for a change. US yields fell up to ‐2.1 bps (10‐yr). The German yield curve bull flattened with yield changes varying from ‐1 bp (2‐yr) to ‐3 bps (10‐yr). Peripheral spreads to core were largely unchanged. Italy (‐3 bps) outperformed. The dollar stayed in defensive mode. Except for a fruitless attempt during European trading hours, the greenback remained on a downward course to its major peers. EUR/USD rose from 1.184 to 1.187 at the close. The tradeweighted dollar gave away the 93 level (92.85) while USD/JPY slid towards the 106 handle (from 106.63). A volatile sterling closed the day a tad lower to the euro just shy of EUR/GBP 0.906 (from 0.905) as it awaits a new round of Brexit negotiations.
Overnight sentiment is mixed. South Korea underperforms in a catch‐up move after a long weekend. Hong Kong erased early losses after announcing more relief measures. Dollar weakness is the name of the game this morning with most dollar pairs closing in on recent highs/lows. At 92.64, the trade‐weighted greenback is venturing in the August depths of 92.52. USD/CNY even dips below the recent August lows already, paving the way for levels not seen since March. USD/JPY declines to 105.62 in a technical move after forfeiting 106. EUR/USD is within striking distance of the 1.19 barrier. Core bonds hold a slight upward bias, extending the reversal that started last Friday.
Today’s eco calendar, containing only second tier US housing data, has zero importance. Monday’s technical and sentiment trading dynamics will thus apply again. Things could get very interesting in dollar currency markets though with most pairs nearing or at key technical levels. We turn a bit more cautious on further dollar losses from here on though. Rising US/China tensions and the Washington stalemate is by and large discounted while, from a technical point of view, these levels have proven to be resilient. We keep a close eye at EUR/USD 1.1916 and DXY 92.51. The big IF are US yields however. The ongoing reversal of last week’s bear steepening move as is the case currently might make things uglier for the dollar. A break lower in DXY sets sights on 91.73 (76.4% retracement). In EUR/USD we’re looking at 1.1996 in case of a leap higher. The EU and UK kick off a new round of Brexit negotiations today but any news of progress (or lack thereof) is probably not due until the end of the week. We remain cautious on sterling and see few reasons for the British currency to outperform over the next few days.
News Headlines
Minutes of the Reserve Bank of Australia’s previous meeting highlight worries that the Victoria State lockdown was a setback to the recovery and would weigh on overall domestic activity. The area is responsible for 25% of the country’s GDP. The unemployment rate is set to surge past 10% later this year with Q2 GDP growth pointing to a (national) standstill. If necessary, the RBA stands ready to purchase Australian government bonds and semis (issued by state and territory governments) in the event of a recurrence of market dysfunction.
US companies issued a record $1346tn investment grade debt since the start of the year, already surpassing the previous (2017) record with over a quarter to go. This year’s US junk bond issuance hit record levels earlier this month. Record low refinancing rates and the Fed’s liquidity backstop contribute to this year’s record issuance.
