Markets
Europe had a bit of a false start yesterday when a green opening for equities, core bond yields, and the euro faded throughout the trading session. It wasn’t until first US investors started joining in the early afternoon that risk appetite again turned for the better. Lacking guidance from the economic calendar and ahead of key events, technical trading eventually led to minimal gains for European and US equities (with new records for some indices). USTs hugely underperformed the German Bund with the yield curve steepening 4.3 bps (10y) to 4.6 bps (30y). Front-end Treasuries rallied (2y yield -0.2 bps) after a strong 2y auction (awarded at 0.242% vs 0.253% WI with strongest indirect award in more than a decade). German yields whipsawed, resulting in negligible changes at the close. The same goes for peripheral spreads. Major currencies were under pressure; the US dollar, Japanese yen and Swiss Franc lagged peers. A strong rebound in commodities including oil (Brent back above $70) additionally weighed on the greenback. EUR/USD closed just north of the first minor resistance at 1.1752. USD/JPY’s balance of weakness tilted marginally towards the yen (109.65). EUR/GBP showed little direction in the mid 0.85/0.86 area.
Record highs in the US only marginally supports Asian sentiment. Equity gains in most cases are limited to <0.5%. Core bonds erase early weakness even as the US House Democrats approved the $3.5tn budget framework, helping Biden to push through his big agenda (see headline below). The dollar licks his wounds after a three-day setback and gains against all G10 peers. EUR/USD slipped at the open to 1.174.
The economic calendar today contains July US durable goods orders that probably fell after a solid June. Germany’s IFO business sentiment for August is worth mentioning though will probably follow the PMI narrative: slightly lower but still (very) strong from a historical perspective. We don’t expect both figures to influence trading much. We see more scope for automatic pilot trading as markets await the first interesting event tomorrow: the ECB minutes. If sentiment doesn’t pick up further, the dollar might retain the benefit of the doubt. In US yields, 1.30% (10y) served as minor resistance this morning. -0.46% acts as the similar technical reference for the German 10y. Both may find it difficult to steam ahead in the current environment.
News headlines
The Democratic majority in the US House of Representatives approved the framework for a $3.5 trillion budget. This approval allows to advance with President Bidens plans to expand spending on child care, education and other social programs. At the same time, an agreement in the Democratic Party was reached to vote in the House of Representatives on the $1 trillion infrastructure bill that was already approved in the Senate by September 27. This is a priority for the moderate fraction of the Democratic Party.
The Finance Minister of Poland yesterday indicated that the Polish government expects the economic recovery to develop at the faster pace than earlier expected as it proposed a draft 2022 budget. Gross domestic product (GDP) is expected to expand 4.9% in 2021 and 4.6% in 2022, the ministry said, up from 3.8% and 4.3% at previous estimates. The budget draft assumes an annual inflation in 2022 of 3.3% versus 2.8% previously. The better economic prospect translates into an expected 2022 budget deficit of 2.8% versus 3.5% expected in 2021. The zloty yesterday gained modestly against the euro (EUR/PLN 4.475) but remains a regional underperformer as the NBP doesn’t join the Czech and Hungarian central bank that already started a forceful tightening cycle.
