The outcome in key markets yesterday wasn’t that different from Friday. US and European yields were a little higher. Changes in the broader US and European equities were negligible. Admittedly, for US indices this still translated in record closing levels. The dollar lost a few ticks. This looked like the standard outcome of an uneventful start of the week. However, the set-up in Asia and early in Europe suggested something different. Unexpected and deep regulatory changes in the China education tech sector stupefied investors as they realized that Chinese authorities can change the rules of the game at any time. The subsequent equity sell-off rolled over into the European session. The German Ifo business confidence missing market expectations didn’t help. Of late, markets mostly were more sensitive to negative news rather than to better than expected data. However, after substantial initial losses, yields and equites overcame the negative narrative. German yields closed little changed. German 10-y yield intra-day hit a 5 month low, but the -0.42%/-0.47% support survived. Similar story on the US bond markets. The US 10-y real yield intraday reached a new all-time low, but in the end the US curve bear steepened with the 10 and 30-y yield rising 1.3 and 2.7 bp respectively. The jury (and the Fed) is still out, but we look out whether this could be a harbinger of a tentative bottoming in core yields. At the same time, a $ 60 bln US Treasury auction of 2-y notes met solid investor demand. The easing of market stress also caused modest USD profit taking. EUR/USD closed just north of 1.18. Interesting, despite recent uncertainty on growth, global commodity indices have resumed their uptrend. The CRB index yesterday reached a post corona peak supporting a rebound in inflation expectations.
This morning, Asian equities show a mixed picture with China still underperforming. Chinese industrial profits slowed further from 36.4Y/Y in May to 20.0 Y/Y. Base effects are in play, but the report also suggests some easing in activity. The yuan is trading marginally stronger at USD/CNY 6.479. LT US yields are up to 1 bp lower. The dollar is little changed to marginally weaker (DXY 92.62; EUR/USD 1.180; USD/JPY 110.20).
Today’s data include US durable goods orders, US housing price data and Consumer confidence from the conference board. As such, the data for sure contain some potentially viable info. However, a real directional reaction probably will be difficult as investors are counting down to tomorrow’s Fed policy announcement. On the Equity markets several US bellwethers (including 3M, Visa, Alphabet, Microsoft & Apple) will publish Q2 results. The US Treasury will sales $61 of 5-year Notes.
Yesterday’s price pattern was a bit mixed/puzzling. US and European markets overcame a negative start. At the same time, real yields remain under pressure. Are markets positioning for the Fed to keep a rather soft bias? Even so, especially on European interest rate markets we look out whether some bottoming might be in store. -0.47% remains first point of reference for the German 10-y yield. -0.09%/-0.14% is important support for the euro 10-y swap. The dollar recently also showed tentative signs of topping out (or at least taking a breather). This process might continue going into tomorrow’s Fed meeting. EUR/USD 1.1881/1.1895 is first ST technical resistance, but a test is unlikely before the Fed meeting. Sterling (EUR/GBP 0.8540) remains in reasonably good shape. Today, CBI retail data will be published. In central Europe, we keep a close eye at the policy decision of the Hungarian central bank. Markets don’t exclude the MNB considering a 0.30% rate hike instead of 0.15%.
According to data of the Bank of Korea, GDP growth in South Korea in the second quarter printed at 0.7% Q/Q after rising 1.7% in Q1. Due to favourable base effects, Y/Y growth accelerated from 1.7%Y/Y to 5.9% Y/Y, still marginally softer than expected. Growth was mainly driven by private consumption and government expenditure. Exports were slightly softer than expected. The South Korean Parliament last week approved a supplementary budget of KRW 34.96 trillion won to provide additional pandemic relief. The bank of Korea indicated that the Q2 growth still keeps the economy on track to reach its 4.% forecasts. So, the door is still open for a first BOK rate hike late this year.