The U.S. rate risks seem to be worth highlighting again with the risk of 2.95% higher than a break to 2.75%. If U.S. rates rise and equities go up – then it’s about USD/JPY, the return of the carry trade and hope for bargain buyers in EM again, writes Bob Savage Friday.
Nothing good ever happens after midnight. Some count sheep when they can’t sleep, others count money. Perhaps Mama’s wisdom rings true for half-year end, but the EU immigration deal hashed out from an all-nighter has lifted risk appetites and the euro (EUR).
The better UK GDP and the lack of bad news on trade allows a relief rally. Throw in the bone that EU’s Barnier says Brexit progress has been achieved, yet divergence over Ireland border issue is huge and PM May pushing for more and faster talks.
Markets are a confidence game and the lack of attention to the usual list of fears helps.
China also helped by easing foreigner ownership rules with the NDRC cutting its “negative list,” seen by many as a bone to spur more U.S./China talks. Risk-on markets mean global shares higher, bonds lower, USD lower and commodities higher. Global coordinated growth hopes are back at the end of the soggy 2Q. The debate for 3Q is about this convergence of growth restarting.
U.S. bond 10-year yields are about 40bps higher on the year while German Bunds are down about 10bps. Seeing the EUR rally back to 1.17 is unlikely to sustain if this persists.
The economic surprise index for the US and EU highlight the problems of explaining away 1Q slow patches with just holidays and weather. The all-nighter result for the EU will surely help but may not be sufficient to end the fears of populist political troubles and ongoing economic muddling through leading to an ECB that can’t quite taper or raise rates.
While Thursday we highlighted the euro as the risk barometer to watch today something is different – blame it on Friday, month-end, quarter end and the July 4th holiday’s next week.
Today is about rates and whether they are going to remain benign in the macro picture or an offset to equity bulls.
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