OPEC+ Raising Output Levels Amid Lingering Uncertainty

Markets

Trading took a guarded start yesterday. Eco data were few. Spain and Portugal prolonging travel restrictions was a reminder that Covid related risks might still resurface and didn’t help to revive an already hesitant reflation trade. European equities lost >0.75%. US indices ended mixed with the Dow losing modest ground (-0.44%). The Nasdaq outperformed closing at a new record level. Markets hesitancy was also visible in a renewed flattening of core yield curves. German yields declined 0.5 bp (2-y) to 3.5 bp (10-y). US yields eased between 1.2 bp (2-y) and 5.4 (30-y). The decline in US yields was almost evenly divided between real yields and inflation expectations. Fed Quarles kept a rather balanced approach but joins the assessment that current supply-driven rise in inflation is mainly temporary. Fed Barkin said the Fed has made substantial further progress in reaching its targets in order to begin tapering of asset purchases but prefers to wait the see the developments next year before deciding on the start of interest rate hikes. Markets currently apparently focus on the softer side of the Fed’s narrative. The overall cautious global mindset slightly supported the dollar, but gains were modest and major USD cross rates remain within post-Fed ranges. The DXY-trade-weighted index finished near 91.88. EUR/USD eased to close at 1.1925. Oil (Brent 74.70) dropped of recent post-pandemic peak levels as markets ponder the chances for OPEC+ raising output levels amid lingering uncertainty on potential impact of new corona variants.

Ongoing headlines of additional measures to contain the spreading of the Delta variant (e.g. in Australia) cause yesterday’s investor hesitance to roll over into Asia this morning, with regional indices losing up to 1.25%. US Treasury yields are little changed. The dollar remains well bid (DXY 91.95, EUR/USD 1.1915).

The calendar contains US house price data and consumer confidence (Conference Board). In Europe the confidence indicators of the European Commission and German June inflation are scheduled for release. US consumer confidence recently stabilized. The expectations component even eased last month. The ISM and payrolls releases later this week are more important but a disappointing release won’t help reflationary spirits. The rise in German inflation might slow to 2.1% Y/Y from 2.4%, mainly to swings in the base effect. Still it will be interesting to the see the market reaction. EC economic confidence is expected to improve further. Core (US yields) rebounded of the post-Fed low, but with the 10-y yield again below 1.50% the picture still looks fragile. Negative data surprises could keep the yield curve flat short term. The dollar since last week settled in a ST consolidation pattern. A more cautious risk sentiment slightly favours the US currency. However, better EMU eco data might prevent a new protracted downleg in EUR/USD. 1.1850 remains first important reference on the charts. EUR/GBP is still locked in a very tight range close to 0.86. Headlines on progress in the EU-UK trade talks with respect to Northern Ireland for now doesn’t help sterling.

News headlines

The People’s Bank of China concluded its quarterly meeting of the monetary policy committee. The published statement is more bullish on the recovery than in Q1, but reiterated that the macro leverage ratio (total debt as % of GDP) will be kept stable and vowed to match the money supply and aggregate financing expansion with the nominal GDP rate. The PBOC used a new phrase with regard to the Chinese yuan, saying it will “promote internal-external balance”. This might hint at slowing down this year’s appreciation in order to keep exports competitive. USD/CNY currently trades near 6.46, near levels seen at the start of the year but way below the USD/CNY >7 from the start of the pandemic.

The FT reports that the biggest US bank yesterday announced an extra $2bn of dividends next quarter as last week’s solid Fed stress tests prompted the US central bank to ease restrictions on dividends and buybacks. Goldman Sachs ($2 from $1.25), JP Morgan Chase ($1 from 90 cents), Morgan Stanley (70 cents from 35 cents) and Wells Fargo (20 cents from 10 cent) are amongst the institutions who gave an investor update yesterday.