Last Friday ended on a positive note. The risk-off that took markets hostage for most of the week subsided. Dip-buyers entered European and equity markets, lifting the EuroStoxx50 from the 4100 support area (+0.55%) and the S&P500 (+0.81%) from similar technical references around 4400. US Treasuries erased earlier gains, leading to a bear flattening of the curve with the belly underperforming. Yield changes varied from +0.5 (2y) to +1.5/1.8 bps (5y/7y) to -0.2 bps (30y). German Bunds outperformed, trading a narrow sideways trading range to finish unchanged. The 10y yield remains within proximity of the -0.50% support. The dollar’s bull run reversed as sentiment improved. EUR/USD’s break below 1.1695/1.1704 on Thursday did not meet with follow-through action. Instead, the pair fought its way back north of 1.17. In parallel price action, the trade-weighted dollar’s (closed at 93.49) technical momentum generated after capturing 93.44 (previous 2021 high) faded. USD/JPY was little changed. EUR/JPY and EUR/CHF extensively tested 128 and 1.07 respectively in the days before, but both support zones survived, triggering a minor rebound going into the weekend. Sterling remained in the defensive after a week of unconvincing data made investors ponder the UK central bank’s hawkish turn earlier this month. EUR/GBP rose from 0.856 to 0.859. It started the week just north of 0.85.
Last week’s risk aversion to some extent was driven by China’s slowing growth momentum and tech crackdown. Today however, Chinese stocks are among the better performers. Japan (+2%) ignores poor PMIs (see below). Core bonds grind lower. The dollar is under pressure against all G10 peers but the Japanese yen. EUR/USD rallies further north of 1.17. In smaller currencies, the kiwi dollar underperforms after PM Ardern again extended the national lockdown to August 27 after identifying 35 new cases, bringing the total in the community outbreak to 107.
We believe the better risk context might get additional support from today’s European PMIs. We see some downside risks for the manufacturing gauge (already at or close to record highs) due to supply constraints which are hurting for example car makers (see last week’s reporting). The services PMI should confirm the sector is in a strong place, in part thanks to tourism picking up over the past few weeks. EUR/USD’s first resistance is situated at 1.1752. We’re cautious in expecting a sustained turnaround with the Jackson Hole symposium looming though. Powell might give more clues on the upcoming tapering and that’s a big risk for EUR/USD short term. The British pound better hopes UK PMIs do not disappoint as well. If they do, keep an eye at EUR/GBP 0.86.
The Japan composite Jibun PMI dropped from 48.8 to 45.9, the lowest level since August of last year. The decline was mainly driven by a further contraction in activity in the services sector (43.5 from 47.4) as the impact of the delta corona variant forced the government to extend the state of emergency. Activity in the services sector printed below the 50 boom-or-bust level for the 19th consecutive month. Activity in the manufacturing sector continued to expand, but a more modest pace (52.4 from 53.0). According to Markit, new order inflows saw a sustained increase, although the pace of growth was the slowest since January, while severe supply chain disruption hampered the receipt of inputs for production. Even so, manufacturers expectations on demand remained strong, encouraging firms to increase staffing at the quickest peace since January 2020.
Swedish Prime Minister Stefan Lofven unexpectedly announced that he will step down as leader of the Social Democrats in November and end its term as Prime Minister. Lofven was prime minister since 2014. A new leader will be elected at a party Congress held November 3-7. This new leader also might become the new Prime Minister, to be approved by parliament. The replacement of Lofven is still to be decided, but Finance Minister Magdalena Andersson is mentioned as a candidate. Next general elections in Sweden are scheduled for September 11, 2022.