Yesterday’s upward move spurred by some positive news in the trade front faded. U.S. and European stocks fell and government bonds resumed their rally as weak economic data from Germany and China renewed investors concerns on global economic growth. The appreciation of safe-haven currencies and rallying gold prices indicated a strengthening risk-off mood across financial markets.

Germany’s flash GDP shrank in the second quarter, in line with expectations (-0.1% q/q, consensus -0.1% q/q, previous quarter 0.4% q/q). This contraction was driven by slumping exports which declined more rapidly than imports, reinforcing markets expectations for the ECB to relax monetary policy to stimulate the economy. However, the positive contribution came from domestic demand (private and public) and from investments outside the construction sector.

Regarding industrial production, the Eurozone showed a sharper-than-expected decline in June (-1.6% m/m, consensus -1.5% m/m, revised data from the previous month 0.8% m/m). China’s growth in industrial output fell to its slowest rate in 17 years in July (4.8% y/y, consensus 6.0% y/y, previous month 6.3% y/y). Moreover, Chinese retail sales also disappointed in July (7.6% y/y, consensus 8.6% y/y, previous month 9.8% y/y), dragged down by weaker auto sales last month.

Sovereign bond yields resumed their downward trend. The 10Y U.S. Treasury yield fell sharply by 11 bps. while the yield on the 30Y U.S. Treasury reached its record low (+2.04%). The 7-2Y yield curve inverted in the U.S., mounting concerns over a global slowdown. In Europe, the 10Y German bond yield continue to hit fresh lows (-0.65%) while peripheral risk premia narrowed, especially in Italy after yesterday’s rejection of Salvini’s plan of an immediate vote of no confidence (see). Furthermore, the spread between 2-10Y UK Gilts yields dropped below zero for the first time since the financial crisis.

The risk-off mood fueled the flight to safe-haven currencies with the JPY rebounding from yesterday’s losses. Elsewhere, the euro inched down while the pound was flat despite the better-than-expected inflation in July. In EM, Latam currencies depreciated with the ARS underperforming across the board. The PBoC strengthened its daily reference more than expected after the U.S. decision to delay the imposition of new tariffs on certain Chinese imports. However, the offshore Yuan slipped driven by the weak Chinese activity data while the onshore currency gained following a stronger daily fixing, mirroring that the delay in tariffs lacked of conviction to resolve the trade tensions.

American and European stocks slumped with cyclical sectors underperforming as the outlook for global economic growth deteriorates with the VIX index above 20. Moreover, the banking sector dropped significantly.


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