Markets
The corrections that enfolded yesterday during the US trading session continued to work through in European markets today. European/German yields joined yesterday’s intraday reversal in the US and took the way south. Disappointing German July retail sales (-0.9% M/M) in the wake of yesterday’s dismal (negative) EMU headline inflation only reinforced the bid for European bonds. The German yield curve bull flattens with the 2-y yield declining 1 bp and the 30-y declining 3.5 bps. The combination of low inflation and a strong euro also fuels market debate/speculation that the ECB maybe will have to consider further policy stimulation further down the road. In the US, yields moved slightly higher after yesterday’s setback. Early in US dealings, the US ADP labour market report was substantially weaker than expected with US private job growth at 428 000, versus 1 mln expected. US yields briefly ticked lower but the move could not be sustained. US yields currently are rising less than 1 bp across the curve. However, it still looks fair to conclude that the post-Powell steepening move has run its course, at least for now. The decline in core bond yields combined with an outright risk-on sentiment caused a narrowing of intra-EMU spreads (Italy, Spain and Portugal -3 bp). Greece slightly underperforms ( +2 bp). Greece today reopened the sale of a 2030 bond. Germany today sold € 3.3 bln of bonds 2020 bonds at a yield of -0.69 % and a bid cover of 1.82. However, the focus on the market was on a inaugural German Green bond sale (cf infra).Equity markets remain in excellent shape. European equity markets are gaining up 2.0%. US markets opened with a gain of about 0.5%. The rebound of the dollar (infra) probably explains part of the European outperformance today.
• Yesterday’s dollar rebound continued. We didn’t see any obvious economic news behind the move. Technical considerations/profit taking in a market that had become a bit overly positioned short USD, probably was the main driver. The USD rebound slowed temporary after the publication of the US ADP report. However, with the trade-weighted dollar (DXY) at 92.70 and EUR/USD at1.184, the dollar is still trading near the strongest levels of the session. The gain in USD/JPY is moderate compared to other major USD cross rates (106.20). The rebound of the dollar also weighs on the central European currencies with the Czech krona, the zloty and the forint all ceding ground. The forint is nearing the key EUR/HUF 359/360 area (key support for the forint). Regarding sterling, Brexit returned in the spotlight as EU negotiator Barnier gave an in extenso update on the status of the negotiations. At least in Barnier’s view, the process is still deadlocked as he reported that the UK isn’t engaged constructively and is not seeking a compromise on key issues. Still, sterling again hardly reacted. EUR/GBP extends its recent corrective downtrend and is changing hands in the 0.8885 area. The 0.8865 support is coming with reach.
News Headlines
Spanish unemployment rose for the first time after peaking in March due to the Covid-19 pandemic. Almost 30 000 people were registered without jobs, bringing the national total to 3.80 mln in August. The increase came amid new outbreaks in the country as well as others imposing travel restrictions, prohibiting its residents to travel to Spain.
Germany’s first-ever 10y green bond drew a lot of investor attention with bids piling up to €33bn, more than 5 times the amount sought to raise (€6.5bn). The bond was priced one basis point lower than the existing conventional bond. A second bond is planned for the 4th quarter this year, to bring total green issuance to €11bn.
