Markets took a shaky start for the new trading week. A tightening of regulation on (education) tech companies in China overthrew the constructive sentiment at the end of last week with US indices setting new all-time record levels on Friday. Chinese equities closed with losses of 4.13% (Hang Seng) to 3.22% (CSI 300). Harsh comments at the start of high level talks between US and Chinese officials on the stalemate in their relationship also didn’t help. Selling spilled over into European trading. Things started to look even worse mid-morning, as the German IFO business confidence unexpectedly declined (cf infra). The German 10-yield set a minor 5 month low close to -0.45%. However, from that point European yields and equities succeeded a remarkable comeback. The German yield curve currently even slightly steepens with the 10 and 30-y rising about 2 bp. We didn’t see an specific trigger for this improvement in sentiment. The jury is still out, but German/EMU yields rebounding despite negative news might be an indication that quite a big portion of bad news is discounted. The 0.42%/0.47% support area for the 10-y yield is tested extensively, but doesn’t give away that easily. 10-y intra-EMU spreads versus Germany are little changed with Greece slightly outperforming. US interest rates show a similar intraday pattern as did Europe, but Treasuries still outperform Bunds. LT Yields are little changed after declining up to 5bp+ earlier today. The US 10-y real yield intraday touched an all-time low below -1.12%. Later today, the US Treasury will sell $ 60 bln of 2-year notes.
Moves in the major USD cross rates initially were limited, but the dollar finally underperforms. The trade-weighted USD (DXY) drops to 92.60. The yen slightly outperforms on equity volatility and tentatively lower US (real) yields (USD/JPY 110.30). EUR/USD traded erratically in the high 1.17 area but currently tries to regain the 1.18 barrier. The 1.1750 intermediate support still survives. In speech, BoE’s Vlieghe joined the doves. He advocated not to reduce policy stimulus anytime soon as he sees inflation as mainly temporary and as he wants to assess the impact of the government reducing its pandemic support. Even at the point when tightening will become appropriate Vlieghe assumes not much will be needed given the low level of the neutral rate. Sterling hardly reacted to Vlieghe’s comments, maybe as he will step down from the MPC end August. EUR/GBP currently hovers in the 0.8550 area. Among the smaller currencies a solid performance of the Swedish krone did catch the eye (EUR/SEK 10.20). In Centrale Europe, the zloty (EUR/PLN 4.60) and the forint (EUR/HUF 361.50) stay in the defensive. The Hungarian central bank (MNB) will hold a policy meeting tomorrow. The market is divided on a 15 bp or a 30 bp rate hike.
The German Business Climate index of the IFO institute unexpectedly declined in July. The headline index eased from 101.7 to 100.8. The assessment of the current situation improved from 99.7 to 100.4, but the gain was more modest than expected. The expectations subindex declined substantially from 103.7 to 101.2.This combined pattern of ongoing constructive sentiment on the current developments but less optimistic expectations was visible in manufacturing, services and trade. Construction was the exception to the rule with both current conditions and expectations improving. On manufacturing , Ifo mentions the ‘the scarcity of intermediate products is becoming more critical, and more and more companies complain of a lack of skilled workers. More companies in trade are reporting supply bottlenecks’.
The National Bank of Belgium today also published its monthly business survey. The Business barometer stabilizes near the all-time high reached last month (10.1 from 9.8). However NBB indicates that this stability conceals contrasting trends between branches of activity. The business climate is improving in the manufacturing industry and even more strongly in the trade sector, but confidence has dropped back in business-related services and most notably in the building industry. ”.