Markets
The US was busy on Friday with 4th of July celebrations, so the doors were closed. The moves during the European session are not worth more than a brief recap: stocks are up (0.8%), yields are up (2-3.8 basis points) and the dollar is mostly stable. USD/JPY was an exception, as the yen’s initial gains evaporated throughout the day. The Japanese currency continues to lose further this morning, pushing USD/JPY towards the 162 area. Lots of relief for the JPY on payrolls. EUR/GBP ended the week (well) below the 0.86 support area. The technical picture has deteriorated as such (improved for GBP) with the next levels to watch now being around the big 0.85 figure. In the fundamental bond space, our attention currently shifts from the front to the long end of the curve. European Central Bank policymakers have played down the likelihood of successive interest rate hikes in July, citing the ceasefire and concurrent decline in oil prices as removing the urgency of such a move. However it is interesting to see how long-term inflation expectations (say ten years) have recently reached the 2% level. This indicates that the scope for further declines due to oil prices is limited. Add to that the fiscal story, and there is every reason to believe that the downside in long-term returns is well protected.
US Treasuries reopened little changed this morning after the weekend festivities. There’s a bit of market-related news to start the new week with. The controversial reversal of USA Balogun’s suspension that appeared on the front pages of almost all financial media serves as a case in point. We observe the ongoing Japanese long-term yields rise. It’s pushing 10-year and 20-year bonds to multi-decade highs. We look forward to this sharp trend extending to Europe and the US as well. The US dollar rose in technically insignificant trading. The risk background is mixed with some rotation outside the AI space. The economic calendar is centered around US ISM services for June. Consensus expects fairly stable sentiment (54.1 out of 54.5). The risks, if any, tend to be to the upside with lower oil prices and the potential for the World Cup to boost the economy. Also noteworthy is the Research Policy Committee held in Rome that included Fed Chairman Wunsch and Schnabel of the European Central Bank.
News and opinions
According to the draft budget seen by Reuters last weekend, Germany plans to raise net borrowing in 2027 to more than 203 billion euros. This compares with estimates of €196.5 billion indicated in April. In 2024, the previous government borrowed only 50.5 billion euros. The 2027 draft budget is said to allocate total spending of €555.4 billion, more than the €543.3 billion approved in April. The total investment is expected to reach 117.5 billion euros, approximately 40 billion euros more than originally planned. Reports indicate that new borrowing in the core budget will rise to €118.7 billion, with €54.9 billion borrowed through the Infrastructure Fund and €30 billion through the Special Defense Fund. It was approved by former Chancellor Schulz. Core defense spending is set to rise to €109 billion in 2027 from €82 billion in 2026 in the core budget. Adding €11.6 billion in funds allocated to Ukraine and €9.4 billion in other security-related spending, such as civil protection, intelligence and IT security, defense spending rises to €130.1 billion. Reuters reported that approval of this first draft may take place as soon as today.
In the virtual meeting on Sunday, OPEC+ reviewed global oil market conditions and expectations. The group decided to increase production/reduce production restrictions scheduled for 2023 by 188 thousand barrels per day. The production ramp-up will begin on August 1. The seven member states of the cartel will meet again on August 2. The impact of the decision on global oil supplies remains highly uncertain. It depends on how much oil regional oil exporters can ship through the Strait of Hormuz, where the United States and Iran signed a memorandum of understanding that would lead to a permanent cessation of war in the region. After a long decline in oil prices since the end of April, the price of a barrel of Brent oil is currently stable near $72 per barrel.
