A cautious risk-on start of the week gained a lot more traction yesterday

Markets

A cautious risk-on start of the week gained a lot more traction yesterday. Markets focused on president Trump's announcement overnight he's considering a capital gains tax cut and got their hopes up for a Covid-19 vaccine. Stocks soared in Asia over the EMU to the US. However, sentiment took a turn for the worse in final US trading hours after Senate Majority leader McConnell said fiscal stimulus talks with the Democrats were at a stalemate and there have been no talks since Friday. WS forfeited all gains to close in red. Core bonds were hammered nonetheless. While USTs left intraday lows after McConnell's comments, they still underperformed Bunds (at the long end) as investors prepared for heavy issuance. The US yield curve bear steepened with yields soaring 1.9 bps (2-yr) to 7.6 bps (30-yr). German yields rose 2.2 bps (2-yr) to 5.9 bps (30-yr). Peripheral spreads declined 2 to 3 bps. The dollar initially suffered from risk buoyancy. EUR/USD tested the 1.18 area several times failed to push trough. The dollar then clawed back going into US dealings as momentum built in the US yield rise. The couple eventually closed unchanged at 1.174. USD/JPY performed better and closed firmly above 106(.49) for the first time in two weeks. EUR/GBP was little affected by the June labour report, finishing a choppy session close to but below 0.90 (up from 0.898).

Asian markets pick up where WS ended as there's little news overnight. Most indices slip, China underperforms. New Zealand's central bank kept rates unchanged at 0.25% but increased its bond buying programme to NZ$100 bn (from NZ$60bn) as it wants to "actively get bond yields lower". The pandemic continues to cause economic disruption, the statement said, as evidenced by the recent emergence of the first local cases in three months and the lockdown of Auckland. The RBNZ didn't rule out a lower, even negative policy rate in the future. The kiwi dollar is this morning's underperformer, falling to 0.654 NZD/USD. The dollar in general is doing well this morning. EUR/USD declines to the 1.171/2 area. The trade-weighted DXY nears 94. Core bonds lose some ground though.

Today's economic calendar contains US July CPI. Inflation figures have rarely impacted markets lately as activity data are key. That said, EMU industrial production (June) are a bit outdated with member states having published the numbers already last week. Sentiment will be dominant for trading. The impasse at Washington is reverberating through all markets. EMU stock futures point at a lower opening. Fears rise the nascent recovery could be nipped in the bud at a time where the pandemic isn't really going in the right direction in several parts of the world. We take a close look to the US 10-y heavier-than-normal supply later today which could cause some UST underperformance. We also point at yesterday's break out of the downward trend channel. The dollar might retain the benefit of the doubt in a daily perspective. EUR/USD 1.1696/1.1709 is the first support zone after which comes 1.1614. In the short run, we think the dollar decline might at least take a breather. UK GDP declined a whopping -20.4% q/q in Q2, data showed this morning. However, investors cling on to monthly June data showing the bottom had been reached. Sterling remains below EUR/GBP 0.90 but we're keen to see whether that holds in the current risk climate.

News Headlines

Democratic presidential candidate Joe Biden picked Kamala Harris to be his running mate. Harris is a Californian senator and her ties to the African-American community and self-branding as a "progressive prosecutor" are hoped to support Biden in the race to the White House in November.

The Federal Reserve has revised the pricing for its Municipal Liquidity Facility by 50 basis points after drawing little interest and being criticized is was too expensive. The MLF offers up to $500 billion in lending to US states and municipalities to help manage the pandemic.

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