European markets were in hibernation yesterday, lacking guidance from US colleagues who enjoyed the labour day holiday. Expect for the return of US traders there was every reason to expect anything other than technical trading today ahead of the ECB policy decision. However, the prospect of the US returning apparently was enough to set a different tone already from the start of trading in Asian and Europe. Markets picked up the tentative ‘reflationary’ bias already visible after the, albeit mixed, US payrolls report on Friday. Both US and German yields easily took the way north. The data were second tier and understandably only played a marginal role. German July production (1.0% M/M and 5.7% Y/Y) was stronger than expected, but German ZEW confidence didn’t meet the consensus reference. The expectations subindex declined more than expected from 40.41 to 26.5. At the same time, the current situation assessment improved less than hoped for (from 29.3 to 31.9). A final GDP reading usually is completely outdated news for markets. However, the revision of the Q2 EMU GDP was rather substantial (2.2% Q/Q from 2.0%, including a very strong performance of household consumption, 3.7% from 3.0%). We don’t exaggerate the impact of the release, but it caused a slight acceleration in the Bund futures’ intraday decline. German yields are rising between 2 bps (2-y) and 4.5 bps (10 & 30-y). The German 10-y yield (-0.32%) regained (minor) resistance near -0.35%. The EMU 10-y swap is marching further into positive territory (0.035%). The rise in core yields also leaves some trace in peripheral EMU bond markets with spreads rising up to 3 bps (Italy). Moves in US yields are similar even as the data calendar is completely empty. The 2-y yield gains 0.8 bps. The 10-y adds 4.6 bps, closing in on the 1.37% resistance/ST range top. The move is mainly due to a rise in the real yield component. A sustained break of this level would be significant from a technical point of view. Less supportive financial conditions also cause some hesitation on US and European equities, but losses mostly are less than 0.5%.• Moves in FX mostly were rather modest. The combination of a mild risk-off, no clear guidance from the nominal US-EMU interest rate differential and a rise in US real yields gives the dollar the benefit of the doubt. DXY (92.40) bounces further off the ‘payrolls correction low’. EUR/USD (1.1855) is drifting further south in the 1.18big figure. Even USD/JPY remains well bid despite the risk-off, regaining the 110 barrier (110.15). The test of EUR/GBP 0.86 persists. Sterling slightly underperformance the euro, but for now the impact on sterling of the UK government raising taxes to fund the heath care bill, remains limited.News Headlines
The European Union’s first green bond sale will start in October, Budget Commissioner Hahn said today. The proceeds of the debut sale are used to fund the €800bn big pandemic recovery plan, of which almost a third is earmarked for investments that promote a transition to more a sustainable economy. When completed, the EU will be world’s largest issuer of environmentally-friendly debt. The news follows similar announcements by countries including Spain, that will kick off green bond issuance this week with a €5bn sale. Hahn also communicated that the EU would start selling conventional bonds via auction alongside syndications. It will start issuing short-dated bills from September 15 onwards.