The German yield curve bull flattened with yields up to 1.1 bp lower
|Markets
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Traders' focus initially remained on stress in emerging markets, triggered by the collapse of the Turkish lira. EUR/TRY spiked from levels around 6 at the start of last week to 8 yesterday morning. The rift with the US which led to economic sanctions against the country added to investors' worries about Erdogan's growth-above-all policy. The TRY sell-off didn't accelerate intraday yesterday, but first steps to bolster the financial system didn't suffice neither to stage a comeback. The German Bund hovered sideways, while the US Note future underperformed somewhat as market tensions eased. The German yield curve bull flattened with yields up to 1.1 bp lower. The German 10-yr yield arrived back at the lower bound of the 0.3%-0.5% trading range, which we deem strong support. US yields added 0.5 bps to 1.7 bps with the belly of the curve outperforming the wings. Peripheral bonds suffered on intra-EMU bond markets with the Italian 10-year spread rising by 12 bps to the highest level (279 bps) since the post-election spike in May. The dollar managed to profit still from its safe haven status against all other majors, bar JPY, in yesterday's opening, but the outperformance didn't last as EM recovered somewhat intraday. EUR/USD hovered around 1.14 for most of the day. Last week's technical break below the 1.15 area still suggests an improvement of the MT technical picture of the greenback. The trade-weighted dollar stabilized north of 95.50/96 resistance. USD/JPY eventually closed unchanged near 110.70. EUR/GBP ended the day at 0.8937, compared to 0.8926 in the opening. EMU, US and UK eco/event calendars were empty yesterday.
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Chinese eco data disappointed overnight, causing an underperformance of Chinese stock markets (-1%). Most other Asian bourses gain ground with Japan posting the largest advances (+1.5%) on the back of a weaker yen. The US Note future trades a tad lower as well, suggesting some improvement in risk sentiment at the start of European trading. The situation on EM/Turkey remains precarious though, so we won't take this for granted yet. The eco calendar heats up with German ZEW investor sentiment, EMU industrial production, the second reading of EMU Q2 GDP and US NFIB small business optimism. We expect today's data to be subordinated to moves on EM with the simple risk on/risk off equation probably at play. The UK eco calendar heats up this week with the labour market report (today), inflation (tomorrow) and retail sales (Thursday). We fear that they'll have minor influence on trading as well. The BoE clearly signaled no intention to hike rates again anytime soon after their August tightening. Additionally, EU-UK Brexit talks are scheduled to resume on Thursday (Irish border) and Friday (future relationship). The Brexit clock is ticking against sterling. EUR/GBP tested the upper bound of the 0.9030/0.8621 range last week, but a break didn't occur.
News Headlines
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Italy's League party expressed concerns over a collapse of the euro if the ECB doesn't offers a guarantee that yield spreads between euro zone government bonds not exceed a certain level. His comments came after Italian, Spanish and Portuguese government bond yields rose in the wake of the financial turmoil in Turkish markets.
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Chinese retail sales slowed slightly in July, from 9.0% to 8.8% (YoY) with 9.1% expected and from 9.4% to 9.3% (YTD) with 9.4% expected. Industrial production (YoY) remained stable at 6.0% last month, while 6.3% expected. Investment in fixed assets (excl. rural households) shrank to 5.5% in July, coming from 6.0% in June.
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A report by China's central bank indicated the yuan's trading band will be further widened and said China should prepare a free-floating exchange rate management framework. The yuan depreciated over 5% this year against the dollar but according to the PBoC, that hasn't led to further depreciation expectations and capital outflow.
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