Markets
The ‘new’ ceasefire between the US and Iran led to further relaxation in markets. President Trump again sees opportunities for a solution. Iran and Oman are apparently negotiating a solution for the passage through the Strait of Hormuz. However, the ‘optimism/relief’ was not equally pronounced across different parts of the market. In the energy markets, oil closed below $89 p/barrel. The reference European/Dutch contract for gas (TTF) also fell sharply (€58 p/Kwh compared to > €63 last week). Interest rate markets still took a more cautious approach. US yields declined 0.8 (2-y) to 3 bps (10-y). A 2-y $69 bln US Treasury auction yesterday attracted solid investors demand. Buying in a 5-y $70 bln sale again was less enthusiastic. Capital goods shipments (non-defense ex aircraft +1.9%) in the durable orders report were again solid but with little impact on markets. Markets still see about 35% chance of Fed rate hike already at tomorrow’s Fed meeting. A ‘risk premium’ of the no-forward guidance era? European bond markets outperformed slightly with German yields easing 3.0 (30-y) to 3.6 bps (2-y). This certainly isn’t spectacular given the sharp increases earlier this month. For both the ECB and the Fed, the market still sees a 25 bpn hike in September (Fed) or October (ECB) at the latest, with even some follow-up action still discounted for early next year. Even at the current, slightly lower energy prices, the market assumes that both the Fed and the ECB may still have to act to keep inflation under control. On equity markets, doubts about AI valuations were at least as great as the positive impact of lower oil prices. (Eurostoxx little changed, Nasdaq -0.18%) On FX markets, the dollar held the upper hand. An attempt by EUR/USD to recapture 1.14 stalled before it had even started. The market apparently does not want to be ‘USD short’ in the run-up to the Fed interest rate decision tomorrow (EUR/USD close 1.137). Could Warsh surprise after all? Sterling also didn’t profit from the broader easing due to lower energy prices, despite a better than expected CBI distributive trades report. EUR/GBP again trended slightly higher to close near 0.855.
This morning, uncertainty on Tech valuations still dominates sentiment on most Asian equity markets (Nikkei currently -4.35%, Kospi -10.5%). US yields are again ceding 1-2 bps across the curve. Brent oil trades below $88 p/b. The dollar marginally outperforms (DXY 101.5, EUR/USD 1.137).
Later today there is again plenty of US data (Trade balance, house prices, consumer confidence) but they probably do not outweigh the ‘headline risk’ regarding developments in the Middle East and sentiment on equity markets. The shadow of tomorrows Fed decision apparently favors the dollar for the time being. The US Treasury will auction $44 bln of 7-year notes.
News & Views
According to Bloomberg reporting, referring to people familiar with the thinking inside the Swiss National Bank (SNB), the bank intends to keep the policy rate at zero until the end of 2027. Afterwards it can raise it. This internal analysis is said to be mainly based on current forecasts for inflation and assumes no major shocks. The assessment is also influenced by the recent weakening of the franc against the euro and the interest rate differential between the franc and the single currency. Negative rates are not the base case, but still can be applied in case of a negative economic scenario. Even after yesterday’s Bloomberg report, markets still discount a first 25 bps SNB rate hike by the March meeting of next year. Swiss June headline inflation was reported at 0.5% Y/Y and core inflation at 0.3% Y/Y, both in the lower part of the 0%-2.0% corridor that the SNB sees as price stability. At its June 18 policy meeting SNB forecasted inflation at 0.6% this and next year and at 0.7% in 2028. It also repeated its increased willingness to intervene in the foreign exchange market to counter a rapid and excessive appreciation of the Swiss franc, which would jeopardize price stability. After briefly touching levels below EUR/CHF 0.90 early March, the franc gradually softened (driven by SNB interventions in Q1). The franc gradually weakened further to currently trade near EUR/CHF. The Swiss currency also lost some modest further ground yesterday.
