Markets didn’t know how to cope with higher than expected data of late, be it prices or activity data. Uncertainty continued to linger whether a positive growth balance can be maintained further in the economic cycle.Are rising prices a sign of accelerating demand or will they complicate growth dynamics? On Friday, decent US retail sales again wasn’t enough to suppress investors’ doubts. June sales, both headline (0.6% M/M vs -0.3% M/M expected) and the control group measure (1.1% vs 0.4% expected) beat consensus. Admittedly, the May figure saw a downward revision. US yields tried an unconvincing attempt to see the story from the bright side, but a weaker than expected U. of Michigan consumer confidence was enough for hesitancy to regain the upper hand. US yields finished the day less than one bp lower. As such this isn’t dramatic, but the US 10-y closing below 1.30% (1.29%) and the 30-y distinctly below 2.0% (close 1.92%) obviously isn’t a vote of confidence on the reflationary dynamics. German bunds outperformed declining between 0.6 bp and 2 bp (30-y). The 10-y EMU swap yield again closed in negative territory (-0.12%)! In this fragile context, equities didn’t profit from lower yields. The 3 major US indices lost 0.75%/0.85%. On the FX market, the majors showed no unequivocal picture. USD/JPY tested the 110.34 area after the US retail sales but closed at 110.07. EUR/USD held a tight range around 1.18 (close 1.1807). Sterling couldn’t capitalize on (some) ‘hawkish’ BoE comments earlier last week. EUR/GBP (close 0.8577) even finished near the highest level of the week.
Asian markets resumed trading in risk-off modus. There isn’t that much of specific news. Uncertainty on the impact of new corona outbreaks causes investors to continue to err to the cautious side. Core bonds remain well bid. The yuan is losing modest ground (USD/CNY 6.4810). ST resistance at 6.49 remains withing reach. AUD/USD (0.7380) is trading at the lowest level since early December as rising Covid cases question the chances for RBA tapering. A topping in (some) commodity prices is a negative too. The dollar (DXY 92.75) trades marginally stronger.
There are very few eco data today. Global sentiment will continue to set the tone for trading with the earnings season coming in full swing. Given current investor mindset, there is probably little room for negative guidance. European investors also look out for the ECB policy meeting on Thursday. From a technical point of view, the US 10-y yield declining below 1.25% and German 10-y yield giving up 0.38% would flash further red lights on the reflationary narrative. DXY 92.85 is also an important resistance for the dollar. A risk-off, in theory, is USD-supportive, but USD gains of late could have been bigger. The ‘reopening narrative’ also doesn’t help sterling as the sustainability of this reopening is questioned. EUR/GBP is again trading in the well-known territory (0.8580).
World’s most important oil exporters OPEC and its allies struck a deal on Sunday to increase oil output by gradually lifting the remaining curbs over the coming months. More specifically, the group will pump an additional 400 000 barrels per day each month starting from August until all of the 5.8 million barrels a day of halted output is restored. The move came after the UAE saw its output baseline revised upwardly and gave the green light for the deal. The eventual outcome in theory is more bearish for oil. The previous proposal also suggested a monthly increase of 400 000 b/d but only covered the period August-December. Brent oil drops about 1% to below $73/barrel.
Czech central bank governor Rusnok in an interview with newspaper Pravo over the weekend said he expects an “extensive debate” at the next meeting on August 5 on whether to lift the policy rate further. Rusnok argued he doesn’t see strong reasons not to continue raising the benchmark, which now stands at 0.5% after hiking for the first time last month. “It’s time and there’s a need to make another little step”, he said adding that he sees risks that global inflation pressures won’t weaken over time because of structural economic changes. He mentioned aging populations and the push to cut carbon emissions. The Czech krone weakens this morning due to overall risk-off but has been the notable regional outperformer lately. EUR/CZK trades around 25.54.