Societe Generale
Storm coming, but not today” was a poor choice of title yesterday! ¢ I’m not sure why everything went wrong yesterday, rather than waiting for the week’s more important data. Still, here we are, with recession fears firmly to the fore, UK monetary policy in a pickle, the UK government in a crisis that rolls on and on to an inevitable conclusion. The big drivers of markets are evolving slowly. Europe’s energy dependency on Russia is falling, but not fast enough to avoid recession if the pipeline is closed. If that happens, EUR/USD will likely lose another 10% or so and how do we handicap that risk? The best I can offer is that there is far, far more discussion of this possibility now than there was a month ago. There is more geopolitical risk priced in, and that’s a good thing. At the start of April, EUR/USD above 1.10 despite a 2-year rate differential that was 20bp wider than it is today.
Take away the gas risk and the euro would be a lot stronger, but we can’t do that, any more than we can take away concerns about the ECB’s anti-fragmentation policy. The BTP/Bund spread is back under 2%, the 10year BTP yields 3.2%, more than 1% of its peak, but the damage is done. The euro-supportive power of rate hikes is eroded by the fact that the bond market isn’t trusted to stand on its own two feet, and the ECB’s credibility is damaged by having over[1]reacted to a spike yields and spreads that was nothing more than a normal response to higher US yields and wider credit spreads globally. The euro loses out, remains effectively unbuyable this summer. It’s so unbuyable that a major political crisis in the UK isn’t enough to drive EUR/GBP higher!
Today’s main event will be the US services ISM report this afternoon. The manufacturing report sent out recession warnings, but services are in better shape, facing a hiring challenge more than a demand challenge. We’ll look at the orders-inventories gap, which has diverged from manufacturing of late (see below). But strong data might highlight the divergence from Europe, while soft data increase global recession concerns. Meanwhile, Olivier published a long AUD/NZD trade idea this morning, as the RBA looks set to hike faster than the RBNZ going forwards.
ING
USD: June FOMC minutes as hawkish as expected
The dollar remains close to recent highs as recessionary fears mount, while central banks remain very much in hawkish mode. On that latter point, last night's release of the June Federal Open Market Committee (FOMC) minutes showed a Fed very much concerned by upside risks to inflation and prepared to take rates into restrictive territory (above 2.5%). Concerns about downside risks to growth featured very little and the Fed's risk management approach is clearly in favour of front-loaded tightening on the risk that inflation is more persistent than expected.
On that subject, EUR/USD one-week traded volatility is climbing back to recent highs near 12%. That is not a surprise given the event risks of the June US jobs numbers tomorrow, but particularly the US June CPI release next Wednesday, where any upside surprises could again cause havoc in global financial markets.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.