Global core bond trading was rather volatile yesterday

Markets

• Global core bond trading was rather volatile yesterday and largely mirrored moves on the Italian BTP market. Italian bonds faced new selling pressure after two Eurosceptic Lega lawmakers were tapped to lead key Italian parliamentary committees that deal with economic policy. Tuesday’s vague German-France proposal to make it easier to restructure EMU bonds from troubled counties and the Italian government’s rejection of a draft pan-European migration solution weighted as well. Core bonds profited from BTP weakness with Bunds outperforming US Treasuries. German yields dropped by 2.8 bps (30-yr) to 4.5 bps (5-yr) on a daily basis while US yields ended 2.8 bps (2-yr) to 4.2 bps (10-yr) lower. 10-yr yield spread changes vs Germany widened by 14 bps for Portugal/Spain and by 23 bps for Italy.

• Euro weakness on the back of the Italian issue was especially at play in EUR/USD during European dealings, with EUR/GBP traders more cautious ahead of the BoE meeting. EUR/USD tested this year’s low around 1.1510, but a break didn’t occur, causing some euro shorts to retreat. The mini short squeeze higher accelerated after a disappointing Philly Fed business outlook, causing EUR/USD to close just north of 1.16. It marked the start a turnaround in USD/JPY as well with fragile US stock markets adding to the picture. USD/JPY eventually declined back below 110. Sterling turned into yesterday’s star performer after hawkish signals from the BoE. An additional member voted in favour of a rate hike (6-3 split) while the BoE wants to start winding down its balance sheet at a lower starting point than previously assumed (policy rate of 1.5% instead of 2%). EUR/GBP ended somewhat lower in the sideways trading range since early May (0.87-0.8850).

• Overnight trading is rather subdued with mixed Asian stock markets, a slightly softer US Note future and a stable USD/JPY. Japanese inflation data printed largely in line with forecasts while the June manufacturing PMI increased. Today’s main item om the eco calendar are EMU PMI’s. They are expected to extend their decline since January with the composite forecast at 53.9 from 54.1 and compared to the 58.8 January top. Risks could be on the upside of expectations as the survey took place after the Italian minicrisis, ahead of the escalation of the US/Chinese trade conflict and with some negatively influencing domestic factors from May dropping out of the equation. Such scenario could give the euro some more short term momentum, moving further away from 1.1510 key support, and weigh somewhat on the Bund. EUR/GBP will closely follow EUR/USD given the empty UK calendar. Italian politics are a wildcard that could still throw a spanner in the wheels. The OPEC meeting in Vienna is interesting, but its market impact will probably be muted given the preliminary production cut agreement already reached.

News Headlines

• The Fed stress-tested 35 of the country’s biggest banks and said that all of them had shown that their balance sheets were strong enough to cope with a financial meltdown similar to the one in 2008. Only Goldman Sachs and Morgan Stanley came close to breaching the minimum capital levels in the worst-case scenario test.

• Eurozone governments and Greece have reached an agreement on a long-awaited debt relief deal for Greece. The deal, said to be ‘historic’ and ending the Greek crisis, pushes back repayment deadlines for almost €100bn of bailout loans and increases Greece’s final instalment of bailout money to help build up cash reserves.

• Ahead of the OPEC meeting planned for today, the members and its allies reached a preliminary agreement, despite the strong opposition from Iran, to boost production by 600,000 b/d. If the agreement gets approved today at the formal meeting, countries like the US, China and India succeeded in pressuring the cartel to boost production.

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