The topics to guide trading were not that much different from the end of last week. What will be the impact of potential financial instability in the Chinese real estate sector for the Chinese economy and for Chinese markets? And how big is the contagion risk for (selected) markets outside China? There wasn’t that much specific news on the issue over the weekend. One of many channels for a Chinese growth slowdown to affect broader markets are commodity prices. At least for now, broader commodity indices return near the post-corona top levels (e.g. the CRB commodity index). Brent oil ($79.5/b) is nearing the psychological barrier of $80. So at least this source of global inflation doesn’t look like abating, with or without a Chinese slowdown. In this context, interest rate markets continued their post-Fed repositioning with core yields extending the forceful break-out that started on Thursday. The belly (10y/5y +3.75 bps) of the US yield curve underperforms the wings (2y +1 bp, 30y +1.75 bps). The rise is slightly more driven by inflation expectations rather than by real yields (cf commodities). The 10-y yield briefly crossed 1.5% intraday, but the move could not be sustained. US durable goods orders for August were ok (cf infra) but had little impact on intraday dynamics. German Bunds outperformed Treasuries, with yields rising between 0.2 bps and 1.5 bps (10-y). Uncertainty on the new German government the this weekend’s parliamentary election is too high for markets to anticipate on more fiscal leeway for the German and/or the European economy. In a hearing before the European Parliament, ECB Lagarde, reiterated the ECB view that inflation is seen as mainly temporary. However, this didn’t decouple European interest rate markets from the broader ‘normalization trade’. ST uptrends in the German 10-y yield (-0.20%) and the 10-y EMU swap (0.15%) remain firmly in place. For now, the impact of higher core yields on intra-EMU spreads remains modest (10-y Italy today widens by 2 bps). After a poor performance on Friday, European equity markets took a courageous start, but momentum again couldn’t be maintained. Is buy-on-dips evolving to sell-on-upticks? The S&P and the Nasdaq also open in red.
A rising US-EMU interest rate differential, a lack of visibility on German fiscal policy going forward and a dwindling sentiment on global equity markets conspired to send EUR/USD back below the 1.1685 area. Still, the 1.1664 key support stayed out of reach. Whatever the reason, the move probably was also due to euro softness. Cable even gains marginal ground (1.37 area). EUR/GBP declined further in in the 0.85 big figure (0.8535). On CE markets, the forint didn’t profit from Moody’s credit rating upgrade late on Friday (EUR/HUF 358.2).
The German Bundesbank in its monthly bulletin warned that inflation rates between 4% and 5% are possible on a temporary basis between September and the end of the year. Inflation is likely to decrease noticeably at the start of 2022 but it will still be above 2% by the middle of the year. ECB President Lagarde in a hearing before EU parliament defended this temporary narrative on the basis of a dissipating impact from increases in oil prices and the reversal of a German VAT rate cut, though she pinpointed some upward risks. Material shortages could prove more persistent while higher inflation could also result in higher wage demands. So far, those risks aren’t materializing.
US durable goods orders rose by a more than expected 1.8% m/m in August, from an upwardly revised 0.5% m/m in July. Orders for commercial aircraft were responsible for a big part of the 4th consecutive monthly increase, rising by 77.9% m/m. Details further showed increase for communications equipment, electronical hardware and fabricated metals while order for motor vehicles, computer and machinery slipped. Core capital goods shipments, used a proxy to calculate the investment component in GDP, rose by 0.7% m/m from 0.9% m/m in July