German Bunds outperformed US Treasuries yesterday

Markets

• German Bunds outperformed US Treasuries yesterday as markets chose not to bet against soft expected PMI's (later today) and the ECB (Thursday). Trump's economic advisor Kudlow confirmed that a US trade delegation will travel to China on Monday to discuss outstanding issues. The report had little to no impact on the Bund but triggered a downleg in UST's which was only temporarily interrupted by disappointing US data. A solid 2-yr auction in the US went unnoticed. The US yield curve bear steepened with daily yield changes varying from +2.5 bps (2-yr) to +3.5 bps (10-yr). German yields were unchanged (2-yr, 5-yr) to 1 bp lower (10-yr). Peripheral spreads narrowed in Italy (-4 bps) and Greece (-5 bps). Today's EMU PMI business confidence takes center stage. Markets expect the recent stabilization to continue with an ongoing discrepancy between the manufacturing and services sector. It probably requires a significant positive surprise - which we don't see happening - for markets to change its view of a (very) soft expected ECB tomorrow. Instead, figures in line or below consensus will likely add fuel to rate cut speculations. That would cause further outperformance of the German bund (near its all-time high) vs. UST's, which might also feel some pressure of a $41 bn 5-yr auction later today.

• EUR/USD further declined yesterday. The move was both due to broader USD strength and euro weakness. Recent US data are seen as too strong for the Fed to already embark for 50 bp rate cut next week. Investors also avoided euro long exposure ahead of tomorrow's ECB decision. Positive headlines on the US China trade talks improved global risk sentiment. The simultaneous, albeit modest, rise in US yields also supported the dollar. EUR/USD dropped below the 1.1180 support, confirming the negative ST momentum. The pair closed at 1.1252. USD/JPY finished the day at 108.23.
  Tomorrow's ECB meeting will continue to cast a shadow on trading today. The EMU composite PMI is expected unchanged at 52.2. We see little evidence of a big positive surprise. So the cautious attitude on the euro might persist. The EUR/USD 1.1100/10 range bottom is coming within reach. One would expect a break only to occur in case the ECB delivers ‘something tangible'. That said, recent low volatility suggests that investors are poorly prepared for a break of long-standing ranges. So, an unexpected break might force additional stop-loss repositioning.

• Sterling trading showed a mixed picture yesterday. Initially the UK currency was under pressure after BoE's Saunders indicated that a BoE rate hike isn't evident in the current uncertain environment. Sterling found its composure later. Boris Johnson becoming the new conservative party leader was already discounted by markets. His pledge to energize the economy (probably via fiscal stimulus) in theory is a tentative sterling supportive. Sterling stabilized against the dollar and rebounded against a weak euro. EUR/GBP closed at 0.8965. Today, Boris Johnson will take office as UK prime minister and will compose a new government. Brexit noise will probably return over time. However, in a day-to-day perspective, sterling selling might ease as markets await initiatives (on Brexit and on other topics) from the new UK government. Some sterling consolidation might be on the cards.

News Headlines

• The US Department of Justice announced it will launch a broad antitrust probe into Big Tech. The DoJ said it will investigate how the dominant tech firms have achieved market power and whether they are involved in practices that curb competition.

• Japanese PMI's edged slightly higher in July. The composite indicator printed at 52.3 vs. 51.9 in June. Services came in at 51.2 vs .50.8.The manufacturing series increased 0.3 points but still suggests economic contraction (49.6). Australia PMI's, on the other hand, indicated a further loss of momentum in the economy. The composite PMI dropped from 52.5 to 51.8.

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