- European equities lose more than 1% today with the German Dax underperforming (-1.95%) as risk aversion reigns over markets following tonight’s North Korean missile launch. Gold prices reaches the highest level since November 2016. US stock markets open moderately lower too, with losses amounting to 0.5%.
- US President Trump has joined other world leaders in condemning North Korea for shooting a missile over Japan, saying that "all options are on the table" for a response.
- Trade tensions mounted after Trump rejected China’s proposal to cut steel overcapacity and urged his officials to find a way to impose tariffs on Chinese imports, the FT reported, citing people familiar. The offer was endorsed by Commerce Secretary Wilbur Ross.
- German consumer confidence improved again in the most recent month, with another high since the start of the series in 2005. French consumer spending rebounded in July (+0.7% M/M, after a dip (0.6% M/M) in June, suggesting domestic demand remains on a healthy albeit not so spectacular growth path.
- EC President Juncker stressed that negotiations about a future EU-UK trading relationship after Britain leaves the EU could only start once divorce issues were resolved. Britain and the EC are holding a third round of talks.
- Poland should nudge interest rates up now to avoid spikes in inflation, central banker Zubelewicz said, taking a minority view. The central bank left rates unchanged last month at a record low of 1.5%, and Governor Glapinski said he expected them to stay there until the end of 2018, based on how inflation was expected to develop.
Rates
Risk aversion causes test of key US 10-yr yield support
Global core bonds profited from today’s risk aversion with classic safe haven assets (JPY, CHF, gold) outperforming and riskier assets (peripheral bonds, stocks) underperforming. The strength of the single currency (see below) is exception to the rule. The German yield curve bull flattens with yields up to 5.3 bps (30-yr) lower. US yields shed 5 to 6 bps with the front end of the curve underperforming (-2.4 bps). The US 10-yr yield extensively tests 2.1% support. A sustained break suggests that the correction lower could extend towards levels from before Trump’s election victory (1.8% area). We don’t take such break for granted right now with a speech by US President Trump (on fiscal stimulus) and key US eco data ahead (which we expect to be strong). Longer term, new hurdles will line up (FOMC meeting, debt ceiling debate, President Trump’s volatility). On intra-EMU bond markets, 10-yr yield spreads versus Germany widen 4-5 bps form Greece, Portugal and Italy.
North Korea’s first missile launch over the northern part of Japan in 20 years triggered an escalation in the region’s conflict. The huge economic impact of hurricane Harvey is also becoming ever more clear. German Bunds copied US Treasuries’ strength in the European opening and extended their run until around European noon as stocks drifted south. The EMU eco calendar only contained second tier national data which didn’t influence sentiment. Market tensions calmed going into US dealings even if US Treasuries continue receiving a decent bid.
The German Finanzagentur held a 2-yr Schatz auction (€5B 0% Sep2019). Total bids amounted only €4.67B, below the €5.44B average at the previous 4 Schatz auction and below the amount on offer. The Bundesbank set aside €0.97B for secondary market operations, resulting in an official bid-cover of 0.9. The prospect of policy normalization over the bond’s lifetime kept some investors’ at bay, despite today’s risk off sentiment. The US Treasury concludes this week’s supply operation today with a $28B 7-yr Note auction. The WI currently trades around 1.93%.
Currencies
Dollar suffers as global risk sentiment plummets
Today, geopolitical uncertainty on north Korea and the potential impact of hurricane Harvey caused an outright risk-off sentiment. Aside from the yen (and the CHF) it was the euro, not the dollar, which took up the safe haven function. EUR/USD easily cleared the 1.20 mark. USD/JPY came within reach of the 1.0813 key support, but a real test didn’t occur.
Overnight, markets shifted into risk-off modus as North Korea fired a missile over Japan, provoking a sharp verbal reaction from South Korea, Japan and the US. Japanese premier Abe and US president Trump extensively discussed the issue and agreed to raise the pressure on North Korea. The yen played its role as safe haven with USD/JPY trading in the 108.75/80 area. However, the loss on Asian equity markets remained modest. It had little impact on EUR/USD. The pair traded in the 1.1975 area.
Late in the Asian session, it looked like (equity) markets would again largely ignore the geopolitical tensions, as was often the case of late. However, sentiment deteriorated sharply at the start of European trading. The dollar came under further pressure. European investors maybe grew more uncertain on the US economy due to the impact of hurricane Harvey. EUR/USD jumped above the psychological level of 1.20. This move triggered a negative vicious cycle of losses of both the dollar and of European equities. European equities at some point lost almost 2%. EUR/USD filled offers in the 1.2070 area. Understandably, core bond yields declined several basis points, but the change in interest rate differentials was very modest given the sharp moves in the FX market. USD/JPY dropped to the 108.30 area, but the key 108.13 support was left intact.
Equities traded slightly off the intraday lows as US investors joined the fray, but trading remained very nervous. The FX trading dynamics also change slightly. EUR/USD lost a few ticks, but USD/JPY remained in the defensive. EUR/JPY almost tested yesterday’s top just below 131, but the test was rejected. The jury is still out, but the intra-day topping out in EUR/JPY may be eased the upward pressure on EUR/USD. For now, the uptrend of euro/downtrend of the dollar remains firmly in place. Even so, we keep a close eye on the EUR/JPY trading dynamics to monitor a potential change on the recent sharp moves.
EUR/GBP tests 0.93 as Brexit talks yield no progress
Today, trading in sterling was both affected by technical/global market considerations and by fundamental issues. Regarding the ‘fundamentals’, the third stage in the Brexit negotiations between the EU en the UK still looks like a dead end street. EU commission President Juncker simply earmarked the UK position papers as not satisfactory. USD weakness prevailed. Cable rose temporary to the 1.2975/80 area. At the same time, the Brexit noise clearly caused a substantial underperformance of cable versus EUR/USD. In this move, EUR/GBP jumped temporary north of 0.93. The pair trades currently slightly below this big figure. Overall negative risk sentiment is also a negative factor for sterling.
