Markets
Ongoing end of quarter position management and uncertainty about the impact of new corona variants on the (pace of) the recovery kept investors from adding to reflationary strategies. Eco data failed to amend this caution. EMU inflation as expected eased from 2.0% to 1.9%, mainly due to base effects. Core inflation (0.9%) remains stubbornly low. US ADP June private job growth printed at a solid 692k. European equites lost about 1.0%. The US fared slightly better with the Dow up 0.6% but the Nasdaq closing marginally softer (-0.17%). US Treasuries were well bid for most of the day, but a setback just before the close left US yields hardly changed (less than 1 bp) across the curve. End of quarter positioning also resulted in participants parking a record $992 bln at the overnight fed reverse repo facility. Bunds (an earlier close) still showed an impressive bull flattening with yields declining between 1 bp (2-y) and 4.5 bps (30-y). The German 10-y yield again dropped below -0.2%. A global hesitant sentiment and the solid ADP report favoured the dollar. EUR/USD revisited the post-Fed lows in the 1.185 area (close 1.1858). The DYX index also closed near the post-Fed top (92.43). An attempt by EUR/GBP to take out 0.86 failed and even cause return action lower. The UK currency outperformed the euro to close at 0.8572.
Asian equities mostly trade with limited losses this morning. China (CSI 300) trades little changed. The Japanese Tankan report (cfr infra) and the China Caixin manufacturing PMI show ongoing growth, but a tentative loss of momentum. USD/CNY (6.4665) follows the broader USD rebound, as does USD/JPY (111.10). EUR/USD is (1.1845) is drifting below last week’s low/support.
With the end of month/positioning out of the way, the focus might return to the data. Final EMU PMI numbers won’t change the broader picture. Question is whether US data will be able to do so. US jobless claims are expected to improve from 411k to 388k. The US manufacturing ISM might ease slightly from 61.2 to 60.9. Recent business sentiment indicators still pointed to solid growth, but the growth pace/momentum may have reached its peak. In this respect, it won’t be easy for the ISM report to revive reflationary spirts. The clue for the next directional move (if any) probably is with tomorrow’s payrolls. Near 1.47%, the US 10-y yield remains in some kind of ST no man’s land. The dollar shows growing momentum. EUR/USD falling below the 1.1850/45 area in a sustained way deteriorates the technical picture in this cross rate, with the 1.1704 correction low again on the radar. Aside from the data, markets look out whether OPEC+ will accommodate a growing demand/supply imbalance. In Sweden, question is whether the RIskbank will make a small opening toward policy normalization further out in time as the economy rebounds at a solid pace.
News headlines
Japan’s Tankan survey for Q2 improved drastically though less than expected. Sentiment at large manufacturers rose from 5 to 14 (16 expected) while its outlook improved from 4 to 13 (vs. 18 consensus). The non-manufacturing gauge is more linked to the domestic situation and lags far behind given extended virus-containment measures. The index rose from -1 to 1 (3 expected) with the outlook inching higher from -1 to 3 (seen at 8). Sentiment for small companies, both manufacturing and non-manufacturing remained in negative territory, meaning more businesses are still reporting bad instead of good conditions. All in all, the series suggest Japan is set to grow in the current quarter after an (expected) recession in the first half of the year.
The Financial Times reports that talks at the OECD accepted Britain’s case to carve out the financial services industry of the proposed new global tax system which shakes up where the largest multinationals have to pay taxes in the future. UK Chancellor Sunak as a concession to the US promised to dismantle the UK’s digital services tax that focuses on US tech companies. In the next phase, talks will center on the second pillar of the proposal, namely agreeing on a global minimum corporate tax rate of 15%.
