European stock markets still opened strong, but gradually lost last week’s vigor as the trading session got going. US stocks eventually closed 0.2% (Dow) to 0.7% (Nasdaq) lower. The same gravity law applied again for core bonds coming on the heels of a short squeeze. German Bunds underperformed US Treasuries with Friday’s June EMU CPI numbers in the back of investors’ minds. The monthly inflation dynamic doesn’t look like slowing, almost cementing >25 bps rate hikes by the ECB from September onwards. Daily German yield changes ranged between +6.2 bps (30-yr) and +12.7 bps (5-yr) with the belly of the curve underperforming the wings. US yields added 5.3 bps (30-yr) to 7.1 bps (7-yr) with the curve dynamics showing similarities to Europe. US eco data included firm US durable goods orders for May (0.8% M/M for key series), a monthly stabilization in pending home sales (though down 12% Y/Y) and feeble Dallas Fed Manufacturing activity (lowest since May 2020). The US Treasury started its end-of-month refinancing operation with a $46bn 2-yr Note and a $47bn 5-yr Note sale. Both tailed quite significantly which shouldn’t surprise given high uncertainty surrounding the Fed’s tightening path and the global central bank tendency to err on the hawkish side of expectations. EUR/USD briefly explored >1.06 levels, but eventually closed at 1.0584 up from 1.0551. The single currency holds a small advantage over the dollar since mid-June, but lacks the real momentum to take out important first support in the low 1.06-area. EUR/GBP closed at 0.8628 from an open at 0.8595. The UK House of Commons yesterday voted in favour to unilaterally changing the Northern Ireland Protocol from the withdrawal agreement (295-221). Unless the government uses some shortcuts, the bill isn’t expected to reach the House of Lords for months. Nevertheless, in the meantime the UK risks entering a trade war with the EU which restarted legal proceedings.Today’s eco calendar contains US consumer confidence and Richmond Fed Manufacturing index. Several central bank heavyweights speak at the ECB’s Sintra event. The US Treasury ends its refinancing with a $40bn 7-yr Note auction. US consumer confidence might be key. We’re eager to see the market reaction in case of disappointment as high inflation starts eating into consumers’ wallets. We don’t expect it to really derail Fed tightening expectations but the outperformance of US Treasuries vs Bunds could be prolonged. Risk sentiment could in such scenario take a new hit, coming nevertheless to the dollar’s rescue short term.
The Indian rupee hit a new all-time low this morning. USD/INR gapped higher to 78.49 this morning and extends gains to 78.63 currently. The Indian currency together with many other emerging market currencies are feeling pressure from persistent foreign funds outflows. India’s central bank has raised interest rates by 90 bps in two moves since May. But the Federal Reserve jacks up interest rates this year so far by even more, reducing the attractiveness of higher-yielding but inherently more risky assets. High(er) energy/commodity prices also increasingly pose economic risks and could put further pressure on emerging market currencies.Incoming Czech National Bank governor Ales Michl suggested in his weekly column that the central bank alone cannot prop up the Czech koruna. The currency will be strong when public finances are balanced over the long-term, foreign trade is at a surplus and the current account isn’t worsening. But Michl said the Czech Republic isn’t meeting any of these conditions, pointing at a switch from exports and inflows of foreign direct investment to consumption and debt. The country needs to change that, he added. Michl takes over from Rusnok in July and has opposed every rate hike since June last year. His appointment sent shivers in the CZK market. The CNB is intervening since then to stabilize the currency at no weaker than EUR/CZK 24.75.