After a risk-off trend almost uninterruptedly set the tone for global trading since end July, little/no news this time proved good enough to trigger a cautious countermove in equities and in FX. US and European markets even ignored a fragile sentiment in Asia after Chinese banks reduced lending rates less than expected, proving less support to the economy than hoped for. The EuroStoxx 50 rebounds about 0.7% (was 1%+ earlier intraday), avoiding a new attack on the key 4200 support area. Similar story in the US with the S&P 500 staying away from the 4328 June correction low. Except for technical considerations, we saw few obvious drivers for the rebound. The (European) rebound – in part driven by energy stocks mirroring higher oil (Brent $85.7/b) and natural gas prices – calls for caution on the sustainability of the move. The bid for equities at least wasn’t driven by a congruent rebound in core bonds. They remained under modest pressure from the start of trading. US yields are rising between 3.5 bps (2-y) and 7 bps (30-y). The US 30-y yield is touching the highest levels since mid-2011. The US 10-y yield is only a whisker away from the 4.335% cycle top. The 10-y real yield (1.99%) nears the 2% psychological barrier. The real yield last surpassed this level in March 2009! At least another good reason to stay cautious on a sustained risk rebound. German/EMU yields lagged the rise in US yields earlier this month but today joined the US move with Bund yields adding between 4 bps (2-y) and 6.5 bps (10-y). Market focus this week evidently is on Fed Chair Powell’s speech at the Jackson Hole symposium on Friday. For European markets we also keep a close eye at Wednesday’s preliminary August PMI’s. The June and July EMU indices for sure were highly disappointing. Still, question remains whether the current slowdown in European growth is enough to bring (services/core) inflation back under control. A positive surprise for the August PMI’s (or the IFO) could in this context wrongfoot investors, reinforce the higher for longer narrative and might even revive more outspoken market anticipation of a September ECB rate hike.
The dollar rally slows on FX markets. DXY trades marginally lower at 103.3. The euro today outperforms after a long-drawn EUR/USD decline earlier this month. The pair tries to regain the 1.09 big figure, creating some breathing space to prevent an immediate attack on the 1.0834 key support. However, the battle isn’t over yet. The combination of a risk-on sentiment an higher US/EMU yields reveals ongoing yen vulnerability. Trading north of 159, EUR/JPY is again nearing last week’s top of 159.36, the weakest level of the yen against the single currency since 2008! USD/JPY (145.9) also keeps last week’s top (146.46) within reach with the psychological 150/the 2022 top at 151.95 seen as a likely level for more decisive BOJ action. No clear directional trend for sterling today even as Gilts both outperform Treasuries and Bunds (yields rising less than 2 bps). Cable (GBP/USD 1.275) gains marginally. EUR/GBP reversed early gains to trade in the 0.855 area.
News & Views:
The German Bundesbank expects Europe’s largest economy to probably stagnate again in Q3 as high interest rates and weak global demand weigh. The German economy continues to be in a weak phase as the country has it hard to overcome the manufacturing-induced slump with momentum in construction also sluggish. At the same time, stable employment, robust wage gains and retreating inflation will help private consumption recover. Increased inflation expectations and a possible recurrence of energy price shocks harbor upside risks for the price outlook together with strong wage growth which is set to remain beyond the turn of the year.
The Belgian debt agency raised a combined €2.8bn by tapping OLO 89 (€1.225bn 0.1% Jun2030) and OLO 97 (€1.575bn 3% Jun2033). The amount sold was the maximum on offer with an auction bid cover of 1.73. Thanks to today’s auction, the Belgian debt agency already raised €37.1bn of this year’s planned €45bn (82.5%). The bulk of this amount was raised via three syndicated deals earlier this year (totaling €16bn).