OVERNIGHT NEWS
* Bonds on course for worst week in two months after trifecta of supply, strongest core CPI print since 1991 and fall in US jobless claims below 1mn; good week for credit and stocks
* Banxico lowered policy rate by 50bp to 4.50%; statement suggest pace of easing may slow; USD/MXN -1% this week
* Japanese investors bought Y1.435trn foreign bonds last week, most since 19 June and second successive week over Y1trn
* FX: NOK (again) and CAD best of the week in G10, ZAR, BRL and RUB top in EM
* Day ahead: US retail sales, Turkey current account, Euro and CEE 2Q GDP
* Nikkei +0.06%, EUR 10y IRS unch at -0.15%, Brent crude +0.3% to $45.1, Gold -0.2% to $1,950
We’re seeing some mild risk aversion into the weekend – we wouldn’t characterize this as a renewed risk off move, but rather some position squaring amid low conviction markets and somewhat negative newsflow. The global economic recovery is looking a little behind schedule in some places: US phase 4 fiscal stimulus negotiations have moved in the opposite direction, Chinese consumption data showed a slower recovery, while second waves in New Zealand’s Auckland and Europe are weighing on sentiment. Consequently, yields, equities and oil prices are lower on the day. Note that the risk aversion is mild in the FX space.
Looking ahead, there’s a swathe of US data to digest – is the consumer behind schedule? Unlikely, but data in the form of July retail sales and Michigan sentiment will direct markets more than IP. We also have US/China phase one trade deal talks taking place on Saturday, so some position squaring into the weekend makes sense.
COP: GDP at 17:00 BST for Q2. Strick lockdowns, particularly in April and May, should have had a strong negative effect on growth. Citi Economics expect second quarter growth, at -13.4% YoY, to reflect the weakest activity print linked to the COVID-19 pandemic response.
Despite the resurgence of cases, risky assets continued to be remarkably resilient overnight.
Rates have even managed to rise a little (the US10y is now back at 0.70%) but none of this is
having a negative impact on US indices. As we have mentioned several time before, the
weaker dollar is somewhat helping the US and is a headwind for EZ financial conditions,
limiting the rebound in EZ stocks.
However, as some travel restrictions are implemented again in Europe, markets are now
weaker in London morning trading; as long as we stay around current low volatility levels,
carry trades should still be OK
Both EZ employment data and GDP numbers were in line with expectations
We expect markets to be more lively next week as more participants are coming back from
the summer holidays