The US Dollar reigned on currency markets

Markets

The US 10-yr yield for the first time since October 2023 pierced through 5% yesterday (+2.1 bps). The breach above this psychologically important barrier was a temporary one and fell just short of the 5.02% seen three years earlier. Changes across the other parts of the curve varied between 4 bps (5-yr)to -0.8 bps (30-yr). Increased bets on Fed tightening later this week – now for more than 90% priced in – pressured front-end bonds. Rising energy prices were to blame. Brent oil retreated from intraday highs to close around $105.7/b but remains near its highest in five months. President Trump in a Truth Social post announced that Ukraine and Russia had agreed not to hit energy infrastructure any longer but neither country confirmed such a truce. That prompted a 5% intraday setback in the likes of European wholesale diesel prices as well. Much of that was and is being recouped again. US rates keep trending north this morning with all maturities either hitting new cycle highs or getting close to. The 10-yr tenor just hit the highest level since 2007. European swap yields surged up to 8.7 bps at the front yesterday. The 2-yr yield rallied to the highest level since end-October. ECB comments in the wake of last week’s meeting were overwhelmingly hawkish and added to already growing tightening bets. Four additional 25 bps moves were priced in by end-2027, implying a 3.5% deposit rate. The 2-5yr bucket of the curve narrowly inverted for the first time since end-2024. The 10-2-yr differential shrank to mere 5 bps. Yesterday’s surge of short-term European bond yields had the smell of an exhaustion move so, unless energy prices would surge further, we may see some consolidation here. Longer maturities remain vulnerable to the inflation and public finance narrative. Stock markets faced selling pressure. Tech stocks were particularly in focus after the call from AI executives to slow down model development. The Philadelphia semiconductor index finished near the intraday lows (-6%). The broader tech index Nasdaq pared an initial 1.3% drop to a 0.5% loss into the close. European equities underperformed (-1%). The US dollar reigned on currency markets. EUR/USD lost half a big figure from 1.16 to 1.155. The pair incurs further losses to 1.153 this morning. DXY rose to as high as 99.73 before capping gains to 99.4. USD/JPY has been oscillating around 154 for the last couple of days but is now headed towards 155 after a report that Japan considers to raise defense spending to 3.5% of GDP under US pressure. That’s a significant bump from the current 1.5% and instantly raises questions on how Japan is going to finance that. A second attempt by EUR/GBP to retake 0.86 yesterday ended in tears, prompting return action instead to 0.8555. The UK labour market report came in too close to expectations this morning for any GBP reaction. Employment grew by 66k in the three months through July while the unemployment rate stabilized at 4.9%. UK yields rise at least, if not more, as much as European ones. Money market bets for the Bank of England amounted to five hikes by end-2027 yesterday. The 2-yr yield was 3 bps away from hitting 5%, a level last seen in October 2023. The eco calendar has little to offer ahead of Wednesday’s FOMC meeting. A $13bn 20-yr US auction is worth mentioning and several ECB policymakers are scheduled to speak.

News and views

Chinese August eco data were mixed this morning with a widening divergens between domestic weakness and external momentum. Retail sales growth slowed from 0.6% Y/Y to 0.4% Y/Y to be up a meagre 1.1% YtD compared with the Jan-Aug period last year (1.2% in July). Fixed asset investment is 7.2% lower YtD YoY (from -6.7% in July) with property investment even crashing by 19.9% YtD YoY (from -19.2%). Low consumer spending and falling investments will add pressure on the Chinese government to implement some targeted fiscal stimulus. Industrial production is currently the bright spot with growth rising by 5.2% Y/Y to be 5.3% higher compared with the same period in 2025. Exports are booming thanks to global AI-boom. The Chinese yuan this year kept its appreciation trend against the dollar with USD/CNY approaching 6.70 for the first time since January 2023.

Ukrainian President Zelenskyy denied US President Trump’s claims about an agreement between his country and Russia to stop mutual attacks on energy infrastructure. He did acknowledge a “strong US proposal for a mutual halt to strikes on critical infrastructure”. “If this can become the first de-escalatory step — a step toward ending Russian strikes on our critical infrastructure and our strikes in response — then Ukraine is ready to support de-escalation.” Russia didn’t respond on a possible deal. Its increased military action, including near the Polish-Ukrainian border, send a different signal.

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