Markets
Yesterday was all about eurozone PMIs, the final reading in the run-up to the ECB policy meeting on September 9. Business confidence remained lofty with the composite PMI coming in at 59.5 (from 60.2). The services PMI stabilized at a 15-year high (59.7). Growth in the service sector even overtook that of manufacturing for the first time in the recovery from the pandemic (manufacturing output index at 59.2). Underlying details all confirmed a strong and solid recovery is unfolding with price pressures still very much in full swing, from temporary elements including supply chain delays as well as from “wage growth as a result of the job market gain”. Strong European data along with the full FDA approval of the Pfizer vaccine in later trading (see below) helped shape the positive vibe rolling over markets, pushing equity <1% higher in Europe and 0.6-1.5% in the US. Brent oil surged more than 5% from $65 to $68.75. The German Bund underperformed USTs though finished well above intraday lows. The yield curve bear steepened with the long end 1.4 (10y) to 2 (30y) bps higher. The 10y tested the -0.46% resistance area but the move lacked thrust. Peripheral spreads widened a tad or two. The US curve steepened with the short end (3y,5y) 1.1-1.4 bps lower. The US dollar slid amid brighter sentiment. EUR/USD rose from sub 1.17 to first (minor) resistance at 1.174/5. It held a status quo against the Japanese yen, which came under selling pressure itself. EUR/JPY on the other hand left further behind 128 (finished at 128.85). The British pound, then, shrugged off a PMI disappointment. EUR/GBP fell from an intraday high just south of 0.86 to 0.856.
Wall Street’s performance inspires Asia this morning. Full risk-on gives equities wings and clips those of core bonds (US yields up to 1.8 bps higher). Major currencies (USD, EUR, JPY) trade unconvincingly and lackluster. The yen underperforms. EUR/USD is sticking to yesterday’s closing levels. We’re probably in for more dull trading today given the empty economic calendar and as the countdown to other key events including the ECB minutes, US PCE and Jackson Hole (Powell’s speech is on Friday 4pm) begins. A benign risk setting in theory gives the euro (and sterling) the upper hand. It’s also an opportunity for Germany’s 10y yield to leave the -0.50% support finally behind. It’s only very tentative, but the bottoming out process in real yields (at -2%) is a good sign in that direction. A first minor resistance in US yields is located near 1.30% (10y).
News headlines
In a deficit financing scheme similar to the one that was put in place between the Central Bank of Indonesia and the Government last year, both agreed that the central bank will again purchase government bonds worth of up to a total of 439 trillion rupiah (~ $30.50 bln) in 2021 and 2022. The interest rate on the floating rate bonds will be equal to the Bank’s three month reverse repo rate, but part of the interest rate cost will be returned to the government. The BI governor said that he couldn’t imagine buying vaccines and funding medical expenses at the market government funding cost of about 6.3%, current 10-y government bond interest rate (source Reuters).
The IMF on Monday decided to distribute about $650 billion of Special Drawing Rights to its members. According to Managing director Georgieva, the biggest ever pay-out of monetary reserves aims to provide additional liquidity, support foreign exchange reserves of member countries and make them less reliant on expensive domestic or external funding. Countries can use the SDR allocation to support their economies and step up their fight against the coronavirus crisis, but should not use the fiscal space to delay needed economic reforms or debt restructuring.
The US Food and Drug Administration on Monday gave full approval for the Pfizer/Biontech Covid-19 vaccine, the first Covid vaccine to receive this status. The vaccine now has full approval for use of people of the age of 16 and older. US officials, including US President Biden, already used this ‘full approval’ to convince citizens to have confidence in the safety and the efficacity of the vaccine and raise the global vaccination rate.
