A summer Monday. No important data and few central speakers (Fed members are in the blackout period ahead of next week’s FOMC meeting). Normally one would expect this to translate into an uninspiring start, with investors marking time going into Thursday’s ECB meeting. Yesterday’s market logic turned out different. The absence of news only encouraged investors to further adapt positing to growing growth concerns. A rebound in global inflections due to the more aggressive Delta Covid variant worked as the catalyst for resurgent doubts on growth. In a secondary order, investors also turn more uncertain whether the recent uptick in inflation still can be seen as a harbinger of current (and future) growth whether, via different channels, could become an obstacle. This mix of uncertainties only accelerated an ever more disorderly unwinding of the reflation trade. Bond markets again took the lead. The US yield curve again aggressively flattened with yields declining between -0. 6 bp (-2y) and 10 bp (10 and 30-y) yields). The US 10-y yield dropped below 1.20%. The 30-y came close to the 1.80% mark. Interestingly, the decline this time was mainly driven by inflation expectations. The decline in 10-y real yields is more modest (-2.75bp, to -1.08%). The similar narrative for the German yield curve with yields easing between 0.7bp (2-y) and 4.4bp(30-y yield). The risk-off sentiment outweighed the decline in core yields as a driver for intra-EMU spreads. 10-y spreads versus Germany widened up to 4 bp (Italy and Greece). The ‘reversal’ in the inflation narrative was illustrated by a free fall in the oil price in the wake of the OPEC+ agreement reached this weekend. Brent oil tumbled dropped from $73+ p/b to $68.62 p/b. Industrial commodities like copper also met strong headwinds even as the picture remains more benign compared to oil. Easing inflation expectations and ‘strange’ intraday gyrations of the dollar prevented gold to profit from this risk-off. European equities lost between 2.50% and 3.3%. US equities also with losses between 1.06% (Nasdaq) and 2.09% (Dow, cyclical), but off the intraday lows. On FX markets, the yen fully played its safe-haven role with USD/JPY closed at 109.45 (start near 110). The order between the dollar and the euro was less clear. EUR/USD dropped near 1.1765 but faced a remarkable (temporary?) short squeeze leaving EUR/USD little changed at 1.18 at the close. Smaller currencies, in general, were under heavy pressure, with commodity-related currencies hit hard (CAD, NOK). Uncertainty on consequences of the UK corona strategy (broad-based reopening) also hurt sterling with EUR/GBP close north of 0.86.
Today’s calendar is again almost empty. Avoiding catching a falling knife remains a key rule in markets. Still, the risk-off in Asia this morning seems a bit less aggressive than was the case yesterday in Europe or the US. Looking out for some calm to return we keep a closer eye on the development of the real yield. A bottoming, combined with inflation expectations that have become less aggressive too, might lay the groundwork for some less forceful repositioning. On the (technical) charts, we look out whether the levels of 1.20% (10-y US) and -0.43% (10-y Bund) might provide some support. A (still hypothetic) easing of global tensions, in theory, might also cap USD gains (ex USD/JPY). Even so, this morning’s trading pattern in EUR/USD still shows a fragile picture with intermediate support (1.1764) ahead of the key 1.1704 still nearby.
The delta variant tightens its grip on Australia. The state of South Australia will enter a week-long lockdown today to halt an outbreak of the virus. It joins Victoria, which extended its 5-day snap lockdown with another 7 days to July 27, and Australia’s most populous state New South Wales that’s been closed for five weeks now. Australia and its economy remain vulnerable to any resurgence of the virus because it is lagging peers dramatically in terms of vaccination progress. The RBA announced it would taper bond-buying in early September because of the faster-than-expected recovery. However, in its meeting minutes, the central bank sounded more balanced, saying it could raise or lower weekly bond purchases. Markets in any case are starting to doubt the planned step towards normalization. The Aussie dollar dipped below AUD/USD 0.74 yesterday and is extending losses today. The 10y yield has declined more than 10 bps in the past two days.