- European equities tread water in a low-volume trading session with UK markets closed for Summer Banking Holiday. US stocks markets opened marginally higher, awaiting key eco data later this week.
- Growth in EMU M3 money supply, an indicator which often predicts future economic activity, slowed sharply in July from 5% Y/Y to 4.5% Y/Y (vs 4.9% Y/Y expected), even as bank lending increased. Growth in corporate lending jumped to 2.4% Y/Y from 2.0% Y/Y, reversing most of its slowdown in June, when one-off factors dragged down growth. Lending growth to households held steady at 2.6% Y/Y for the third straight month, matching its best rate since March 2009.
- Economic confidence in Italy is at its highest level in almost 10 years, as recovery in the eurozone drives renewed optimism. The sub-index for manufacturing has been particularly strong in recent months as companies benefit from rising demand across the continent. Consumer sentiment, in contrast, had fallen back over the last year.
- The US merchandise trade deficit widened a bit in July (from -$64B to -$65.1B), while inventories at wholesalers increased (+0.4% M/M), according to preliminary figures from the Commerce Department in Washington.
- US gasoline futures jumped to two-year highs as Tropical Storm Harvey pummelled the heart of the US energy sector. The impact on oil prices is negligible so far.
- Confidence in Qatar’s creditworthiness took another hit, as Fitch downgraded the country’s debt rating from AA to AA-, citing concerns that the economic blockade imposed by Arab neighbours was unlikely to be lifted soon.
Rates
Slow start of the trading week
Bond trading was extremely thin and largely range-bound given today’s UK banking holiday and uneventful eco calendar. Draghj’s comments at the Jackson Hole symposium on Friday eve (after closure) (substantial accommodation is still needed and core inflation/wages show no signs of an uptrend yet) may help explain the modest curve steepening. The heavy rain fall, epic flooding and closure of some main ports in the Houston area had no immediate effect on the crude oil price (contrary to the gasoline price) and thus also not on bonds. Early losses of European equities and the subsequent recovery didn’t cause the "usual" inverse movement with bonds. Italian manufacturing and consumer confidence printed stronger than expected, while the US trade deficit was a bit bigger than forecast, but the deviation was too small to trigger a meaningful reaction. All in all, an uneventful session. Later today, the US Treasury will sell 2- and 5-yr T-notes.
At the time of writing, the German yield curve steepens with yields slightly lower at the short end of the curve (<1 bp) and up 0.4 to 1.4 bps in the 10- to-30-yr sector. The US yield curve shows a similar pattern with yields marginally lower till the 5-yr tenor and up 0.7 bps and 1.5 bps in the 10-to-30-year sector. Intra-EMU yield spreads are virtually unchanged.
Currencies
Dollar stabilizes after Jackson Hole sell-off
EUR/USD and USD/JPY held extremely tight ranges after Friday’s ‘Jackson Hole rally of the euro/decline of the dollar’. Investors wait for additional input from EMU and US data later this week to assess whether those Jackson Hole moves were justified. EUR/USD trades in the 1.1930 area. USD/JPY hovers near 109.30/35.
Overnight, Asian equities traded mixed to slightly higher. Japanese indices were little changed as USD/JPY returned to the low 109 area. The PBOC set the fixing of USD/CNY at the strongest level for the yuan since August last year. The dollar remained in the defensive across the board. The trade-weighted dollar dropped to the 92.50 area. EUR/USD remained well bid and traded in the 1.1920 area.
There were only second tier eco data in Europe. The EMU money supply and lending data (July) were on the soft side. As usual, the report was largely ignored. European equities opened with losses of 0.50%. The post-Jackson hole rise of the euro was part of the explanation. US equity futures also traded with a slightly negative bias. EUR/USD held a tight sideways range in the 1.1925/45 area. Changes in US/EMU interest rates/differentials were limited. At least for now, the rise of the euro doesn’t cause an outright outperformance of German bunds over US Treasuries. USD/JPY quite easily stayed north of USD/JPY 109 even as equities traded with a negative bias.
Sentiment on risk improved as US dealers joined the fray, even as there is uncertainty on the impact of the hurricane Harvey. For now, the market impact remains limited. WTI maintains a tight range in the $ 47 area. The dollar stabilizes after the post-Jackson hole setback. The US July trade deficit was slightly wider than wider an expected. However, there was hardly any market impact. Investors are looking forward to series of key eco data later this week to decide whether the Jackson Hole decline of the dollar is justified or not.
EUR/GBP: holiday-thinned trading
Today, sterling trading volumes were low as UK markets were closed for the Summer Bank holiday. Cable and EUR/GBP basically maintained the moves after the Jackson hole speeches of Yellen and Draghi on Friday. EUR/GBP held in the mid-0.92 area. Financial news wires elaborated extensive on the start of the 3th round of Brexit negotiations. However, until now, there was hardly any ‘new news’ on the issue. The EMU still wants significant progress on the terms of the separation. The UK wants to take a start with the negotiations on the future EU-UK relationship. EUR/GBP trades currently around 0.9245. Cable holds just north of 1.29.
