After sliding to 3 month lows on “car cartel” concerns yesterday, European stocks have rebounded after three days of declines, while oil extended gains after Saudi export cuts, with Brent rising above $49 and WTI just shy of $47. Asian stocks fell while S&P futures rose 0.2% to 2,473, putting yesterday’s GOOGL drop on plunging Costs-Per-Click in the rearview mirror.
Helping today’s episode of global, pervasive complacency is the VIX which was hammered early by 3% in early Tuesday trading, down to 9.17. As previewed on Monday, the dollar rebounded after dropping to its lowest since August as investors await Wednesday’s U.S. interest rate decision; the greenback strength sent Gold lower for the first time in four days.
US TSYs sell-off in relatively heavy volume after a large futures block trade in London hours and Bunds decline as strong German IFO data weighs. The dollar rallied from overnight low against G-10 and UST move helps USD/JPY trade through yesterday’s high.
Most European industry sectors rose as the Stoxx Europe 600 Index rose 0.5%, with banks leading the way as German 2s10s curve steepens and ahead of bank earnings later this week, helping the DAX regain some of the recently lost ground, although as the chart below shows it has a way to go before catching up with the MSCI World Stocks index which remains just shy of all time highs.
Emerging-market equities fell after gaining in 10 of the past 11 days, on the back The greenback strengthened with the euro, which flirted once again with its highest level in two years after German business confidence data beat expectations. Saudi Arabia’s promise to further cut crude exports pushed Brent to under $1 of $50. Overnight, the Euro got a boost after ECB’s Mersch stated monetary accommodation is still needed and ongoing expansion in the euro area offers confidence but stated that “risks to the euro area growth may be to the upside” and that headline inflation is dampened by weak energy prices, but added that underlying inflation is to rise gradually.
The Euro got a boost as German business morale hit new high, with firms “euphoric” according to the Munich based Ifo economic institute that compiles the data from 7,000 of them in Europe’s largest economy. “Hardly anything seems to be able to hit the German economy,” Ifo economist Klaus Wohlrabe added, saying German business was experienced in managing the impact of exchange rate moves following the euro’s sharp rise.
The Australian dollar rose less than 0.1 percent after erasing an earlier decline. Attention turns to two key events on Wednesday: June quarterly inflation data and a speech on the labor market and monetary policy from Reserve Bank of Australia Governor Philip Lowe. Japan’s Topix index lost 0.3 percent. Australia’s S&P/ASX 200 Index added 0.7 percent. South Korea’s Kospi index retreated 0.5 percent.The Hang Seng Index was little changed while the Shanghai Composite Index slipped 0.2 percent. Strong rally in base metals, led by copper with most noting potential demand growth from China; U.K. mining stocks supported through the equity open.
The Fed starts a two-day meeting later in the day to discuss its monetary stance and the timing of its long-awaited balance sheet reduction, a plan most likely to be detailed in September. “Any major policy announcement is more likely when Chair Janet Yellen faces the press following the September meeting,” J&E Davy Holdings Ltd. analyst David McNamara wrote in a note. “For now the Fed remain on track for a couple more rate hikes at least this year, with most members believing the recent softness in inflation to be temporary.”
The political troubles of President Donald Trump’s White House continue to mount, with investigations into his pre-election links to Russia deepening. There is also growing anxiety about the United States hitting another debt ceiling in October with few moves to potentially offset that.
“We may seem some consolidation here from the dollar but fundamentally our bearish view on it remains,” UniCredit Global Head of FX Strategy Vasileios Gkionakis told Reuters. “What the Fed says tomorrow is the million dollar question… but the risk is that they sound a bit more cautious after the fourth consecutive downside surprise in inflation.”
Greek government borrowing costs meanwhile hovered near their lowest level since 2010, as the country sought to sell its first longer-dated bond in three years. Some five years since European Central Bank Mario Draghi pledged to do “whatever it takes” to preserve the euro, the debt sale by the euro zone’s weakest economy is the clearest sign yet of the bloc’s recovery from a crippling debt crisis.
Elsewhere in rates, the yield on 10-year Treasuries increased two basis points to 2.27 percent, the highest in more than a week. Germany’s 10-year yield rose one basis point to 0.52 percent. Britain’s 10-year yield also added one basis point to 1.194 percent. France’s 10-year yield climbed one basis point to 0.763 percent, the first advance in more than a week. The gap between Italian and German 10-year bond yields narrowed to its smallest since December 2016 at 153 basis points.
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