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Market Comment | Cautious mood in financial markets amid geopolitical and trade concerns

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  • Cautious mood in financial markets as geopolitical tensions re-emerged between the US and Iran, while ongoing trade fears continued to rise.
  • US yields increased all along the yield curve, especially the longer tenors (US 10Y +6 bps, approaching to the 3% threshold), leading the 10Y German yield upward. This increase in safe-haven yields was led by expectations that the BoJ would adjust the parameters of its quantitative easing, draining the liquidity in bond markets. The Japanese 10Y yield increased (+4.6 bps) (see). Elsewhere in the peripheral countries, yields have remained broadly steady ahead of this week’s ECB meeting (see ECB preview below), except in Italy, where political uncertainty increased.
  • In fx markets, the USD was flat against its major peers, despite lower-than-expected US existing home sales for June (see). However EM currencies continued under pressure, the main exception being the TRY, which rebounded against the US dollar. The Chinese currency continued to depreciate, after the PBoC injected $74bn of cash into the banking system through loans to commercial banks (see). The actions sparked fears about a potential currency war. In this context, the CNY reached its weakest level since August 2017. Increasing tensions between the US and Iran boosted oil prices (see). However higher oil prices failed to benefit either the BRL or the MXN, the latter negatively affected by trade tensions.
  • Equity markets declined slightly across the board on the back of several factors such as: increasing safe-haven yields, ongoing trade concerns and renewed geopolitical concerns between the US and Iran. Yet, Chinese stocks ended their session with slight gains after the PBoC injected cash into the banking sector.

 

ECB preview

The ECB is expected to leave monetary policy unchanged at its July meeting, after the announcement of the end of the APP (asset purchase programme) and the enhanced guidance on rates. However, a cautious tone can be expected regarding concerns about protectionism and is effects on activity. The focus in the coming months will be on knowing when and at what pace interest rates will rise.

The central bank remains on track in its exit strategy as economic conditions continue to improve and it is increasingly confident regarding the inflation outlook. In particular, we do not expect changes in forward guidance after June´s announcement.

Economic indicators over the last month seem to confirm that the euro zone is geared towards more moderate but solid growth this year (0.4% QoQ), supported by the strength of domestic demand after slowing markedly in the first quarter. Hard data improved in May but failed to recover from disappointing figures earlier this year, while confidence indicators seem to level off up to June and remain resilient despite increasing uncertainty. In this context, the sharp increase in inflation in May, especially, and June was driven by higher oil prices along with the depreciation of the euro, but core inflation remained broadly steady at low levels over the first half of the year despite incipient signs of inflationary pressures stemming from input prices and a tighter labour market. All in all, the euro zone’s economic performance over the last month was in line with the ECB’s assessment, reinforcing its cautious mood in a global environment of heightened uncertainty, mostly linked to the escalation of protectionism.

Regarding our baseline scenario, we delay the first depo and refi rate hikes after the strong and explicit guidance on rates “interest rates to remain at their present levels at least through the summer of 2019”: first depo rate hike (+20bps) in Sept19, first refi rate hike (+25 bps) in Dec19. However, we cannot rule out a depo rate hike in July or a depo&refi hike at the same time in Sept19, as there is a debate in the Governing Council on the meaning of ‘through summer’, and on the timing of a rate hike: some say as early as July 2019 and others rule out a move before autumn.

One topic that could come up during the Q&A is that of market jitters due to global trade tensions and their consequences for the global economy and particularly that of the euro zone. Regarding this, Mr Draghi will adopt a cautious tone, but he will confirm that trade fears are already affecting the economy. Despite this, it is very likely that the central bank will downplay the turmoil somewhat, emphasizing that the economic recovery remains robust and that it is confident of the recovery of inflation, keeping the central bank on track in its monetary normalization process.

 

Table 1

Update 18:00 CET July 23

Fuente: BBVA Research

 

 

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Fuente: BBVA Research

 

 

 

 

 

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