Markets
European equities performed rather strong in the absence of a clear lead by the US yesterday. This morning, it looked that trading could stay constructive. However, sentiment dwindled soon after the European open. A further rout in technology shares (Nasdaq future) soon contaminated broader indices and accelerated going into the start of the US session. US Trump fueling China-US tensions as he advocated a separation of both major economies didn’t help to comfort investors. There were few eco data to counterbalance the tech-driven risk-off. The US NFIB small business confidence printed stronger than expected at 100.2 (from 98.8). The Improvement in the small business owners’ job creation plans is promising, but at the same time, the uncertainty also rose further. European equity indices are losing up to 2.0%/2.5%. The Nasdaq opens 3.5% lower. The S&P declines more than 2.0%. The slide in equities this time also translated into outright risk-off positioning in other markets. Both the US and the German yield curves show a bull flattening. US yields decline between 0.2 bp (2-y) and 6.5 bp (30-y). In this respect, US yields reverse a big part of the sharp rise at the end of last week. Even so, US yields are still higher compared to last week’s pre-payrolls’ levels as investors prepare for the US Treasury’s monthly refinancing operation starting this evening with the sale of $50 bln of 3-year notes. Sales of 10-y ($35 bln) and 30-y paper ($ 23bln) are scheduled for tomorrow and Thursday. Germain yields join the broader flattening trade declining between 0.5 bp and 4.0 bp. The impact off the risk-off on intra-EMU government bond spreads (10-y) remains modest. Greece slightly underperforms (+4 bp).
Of late, the safe haven function of the dollar was often less straight forward. Today, the US currency again received the benefit of the doubt. The trade-weighted dollar (DXY) rose to the 93.30/40 area. However, USD gains against the other majors remain modest. EUR/USD dropped below the 1.18 mark, but didn’t break any key support levels yet. (currently 1.1785 area). USD/JPY again shows no clear directional trend. The yen slightly outperforms the dollar with USD/JPY returning near the 106 handle. The, albeit modest rise of the dollar also caused the usual inverse corrections with commodities. Brent oil is drifting back south toward the $40 p/b level. Also the likes of copper, gold and silver are heading south, confirming the broader risk-off bias.
A broad risk-off going hand in hand with escalating Brexit tensions accelerated sterling selling. Sir Jonatan Jones, head of the UK government’s legal department, leaving his job on reported anger over Boris Johnson’s plan to override parts of the UK withdrawal agreement, only illustrates that the Brexit process is nearing another crossroad. Markets are also raising bets that the BoE will be forced to assume negative interest rates, with the UK 2-y yield touching a record low level (-14 bp). The UK currency both suffers against the euro and the dollar. Cable is nearing the 1.30 psychological barrier (currently 1.3040 area). EUR/GBP convincingly regained the 0.90 barrier (currently 0.9040 area).
News Headlines
The South African economy shrank with a massive and larger-than-expected -51% q/q annualized during the 2nd quarter. The decline followed a -1.8% fall in Q1 and is the fourth consecutive quarterly contraction. Mining (-73.1% q/q), manufacturing (-74.9%) and construction (-76.6%) were among the worst hit sectors, closely followed by trade (-67.6%) and transport and communication (-67.9%). The South African rand slipped to the dollar towards 16.94.
Top economic policy maker Valdis Dombrosvkis will become the next EU trade commissioner. He will replace Hogan, who was forced to resign over breaching Covid-19 guidelines. Ireland’s McGuinness will take over Dombrovskis’ previously held position of financial stability, financial services and capital markets union.
