The momentum of the risk is not really convincing



Trading for the new week took a slow start while the American markets were closed in compliance with the 4e July holidays. In Europe, only second level data had to be published. Last week’s growth panic has subsided, at least temporarily. However, in the new era of markets, a day of relative calm still allows for moves in (European) interest rate markets of more than 10 basis points. After the sharp decline in yields last week, markets have apparently reached a more neutral position. Bund yields rose 10/11bp across the curve, with the very long end outperforming slightly (30y +7.2bp). The German 10-year yield (close to 1.33%) bounced off the key support zone of 1.15%/1.18 (38% retracement March/previous high). Intra-EMU spreads against German have finally ended the recent narrowing trend (Greece being the exception). The Italian 10-year spread widened by 5 bps. Chief Buba Nagel said the ECB’s new crisis tool to support weaker countries’ bond markets should only be used in “exceptional circumstances and under narrowly defined conditions”. members of the ECB lately. European equities initially gained ground, but ultimately the gains, if any, were negligible (EuroStoxx50 +0.12%). Potential inflation and growth headwinds remain a huge uncertainty factor heading into the earnings season. In the FX markets, the Dollar stabilized slightly below recent highs (DXY close at 105.14). EUR/USD closed slightly higher at 1.0422, but the technical picture remains fragile. The Pound has maintained a narrow sideways range near the 0.8620 pivot. Asian stocks and US futures are looking for some bright spots this morning in a video call between US Treasury Secretary Yellen and Chinese Vice Premier Liu He. The United States is considering cutting some of the Trump-era import tariffs to dampen inflation. However, the risk dynamics are not really convincing. China’s Caixin PMI (composite 55.3 from 42.2) also suggests an economic recovery as corona restrictions are eased. At the same time, rising yields and rising energy prices (oil and European natural gas) remain persistent challenges to global/regional growth. The dollar is trading mixed (DXY 105.10). The yen is underperforming due to rising basis yields and energy prices. USD/JPY regains the 136 handle (136.25). EUR/USD gains a few ticks (1.044). The 50 bp rise in RBA rates was apparently totally discounted by the Australian dollar (see below). Later in the day, the schedule is slim. US Factory Orders and EMU End PMIs are unlikely to be market drivers. In the interest rate markets, we are looking to see if yesterday’s rally could be the start of a bottoming process (in yields). EUR/USD avoided a real test of the key support zone 1.0350/41 last week. Still, the picture remains fragile as long as the pair fails to regain the 1.0615 level. It still seems quite a long way off. The BoE will publish its financial stability report today. It is unlikely to contain much positive news for the pound. For now, EUR/GBP trading is still guided by a gradual but prolonged buying pattern.

News headlines

The The Reserve Bank of Australia made a consecutive 50 basis point rate hike this morning, raising the key rate from 0.85% to 1.35%. Inflation is expected to peak later this year and return to the target range of 2% to 3% next year. Medium-term inflation expectations remain well anchored and the RBA stresses the importance of this remaining the case. Resilient economic growth and a tight labor market (including wage growth) add to the fact that the current, still extraordinary monetary support is no longer necessary. The RBA remain loyal to their striker indications that further rate hikes will come with size and timing dependent data. The RBA specifically mentions the Release of Q2 CPI (July 27) as key data for inflation outlook. Household spending is an economic risk. The Australian dollar is virtually unchanged (AUD/USD 0.6875) after June’s underperformance (commodity correction and dollar strengthening). Australian swap rates are also stable. Money markets discount a policy rate of 3% or more by the end of the year.

Gas prices in Europe yesterday went by 10% as a strike at Norwegian gas fields over a pay dispute began overnight. 191 additional members would join the strike from July 9 if no solution was found. Gas production is expected to fall by 292,000 barrels of oil equivalent/day, with Norway’s daily gas exports falling by around 13%.


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