The first results of the summer marathon

Last week (for the first time in the history) Germany has sold 10-year bonds with a zero nominal interest income

Statements of the leaders of the Central Banks which contained promises «to fill in» the markets with the liquidity on a wave of the Brexit outcome and the FRS rates restrained investors from panic selling long enough. Control points have been passed, but there are no changes in the market.

A tone of the Federal Reserve was unambiguously «hawk», but following the results of a meeting on July 27 quotations of the US dollar have gone down that can cost much to investors who have increased a share of risk assets in the portfolios and have purchased, for example, bonds of the problem European countries in the hope for the rally under the influence of QE from European Central Bank.

The FRS is quite expected to leave an interest rate at the level of 0,5%, dynamics of the labour market is estimated positively. There have been traditional notes on inflation, and even weak data on the GDP surplus for the second quarter do not spoil optimistic estimates. In the whole the FOMC does not really worry about the health of the American economy and considers that there are no reasons to hurry with increasing of the rates.

A sharp decline in the profitability of the US Treasury bonds was the additional driver for the dollar growth. Now there will be a confusion in the markets before each new FRS meeting because the conditions for further toughening have practically ripened.

Following the colleagues the Bank of Japan has taken the same waiting attitude, as well as European Central Bank, Bank of England and FRS, that has disappointed investors who expected more radical measures of stimulation. The rate and growth of a monetary base by 80 trillion yen a year have remained unchanged, for the other assets, including state bonds, have not changed. The US dollar credit program has been seriously corrected (to $24 billion). At first on Abe's performance, and then on the final statement of the BOJ the yen has grown and at the moment its correction does not cancel the descending trend for USD/JPY.

Last week (for the first time in the history) Germany has sold 10-year bonds with a zero nominal interest income, which is at the price above the nominal value. Now investors not only do not receive even the minimum coupon payments, but also they will not even return the capital when bonds are paid off in 10 years at par value. Today these bonds in the amount of €4.038 billion, bring in a negative income of -0.05%. For those who hold these bonds to the term of their maturity (most often it is necessary for compliance with the financial regulation - pension funds, insurance companies), the loss of the equity plus a zero interest income, and moreover loss of purchasing power in 10 years of inflation are guaranteed. If it is assumed that these 10-year papers are used by analysts as a standard for an assessment of other European assets, then such «planned» losses seriously worsen the European investment climate.

It also should be noted that:

  1. S&P and Fitch have lowered the ratings of the UK from «AAA» for «AA», while Moody's have only reviewed the forecast from «stable» for «negative». IHS Markit has published data on the key PMI indicators: Manufacturing, Construction and Service have been published ahead of schedule. Data for forming of an index were used on the basis of 70% of completeness of the poll of respondents.
  2. Monte dei Paschi tries to obtain the approval of the restructuring plan from the European Central Bank, the key point of which shall be a sale of a packet of the unrecoverable loans of €10 billion and the attraction of the supplementary capital in the amount of €5 billion by the end of the year. It is planned to sell the most part of «bad» debts to Atlante fund which is managed by the government of Italy whereas the better loans will be sold to the private investment funds. There was an information that letters containing offers of Corrado Passer, the former banker and the minister in Italy, and the letter from UBS AG Swiss Bank have been received. The bank tries to put the long-term problem to its end and not to resort to financial aid of the Italian government. The details of the outcome of the directors meeting on Friday have not revealed yet.
  3. The British Lloyds Banking Group PLC has shown a net profit in the first half of 2016 in the amount of ₤1,59 billion ($2,2 billion) in comparison with ₤211 million loss for the similar period of the last year and announced job cuts for the purpose of the expense reduction. To compensate possible decrease in profit following the Brexit, the bank has made the decision to close about 200 departments and to dismiss up to 3 thousand employees.

In general the market has already reflected the results of the FOMC meeting. Till September serious reaction is possible only on the publication of the data from the UK. The forthcoming long process of the «divorce» will lead to the fact that European Central Bank will not start expanding the stimulation, and the FRS can raise interest rates by 0.25% on a wave of positive news and economic statistics data from the USA. Alternatively, the Federal Reserve will be changing the rates until the end of the year, when the situation with the Brexit consequences would have been clear up.

The parade of the Central Banks will be finished by the Bank of England on August 4. Published earlier Mark Carney's statements, the forthcoming inflation quarterly statement and the current comments of the leading financial «gurus» strengthen the probability of the decrease in interest rates. We will trace the current British statistics within a week and will not forget about the next NFP on Friday.

EUR/USD: There are attempts to be fixed in a zone 1.1170-1.1200. Intraday supports for breakdown down: 1.1100 - 1.1070 - 1.1030 - 1.0990 (very strong). Intraday resistance: 1.1190 - (1.1230/1.1240) - (1.1300/1.1320) (very strong). Steady trade higher than 1.1300 gives the chance of the movement to strong medium-term resistance 1.1370 and in case of his breakdown level 1.1500 will be actual again. Strong fundamental factors as levels 1.1050 - 1.0950 - 1.0850 are considerably strengthened by options are necessary for the movement down.

USD/JPY: Intraday resistance: (103.30/103.50) - (104.16/104.68) - 105.50 - (106.08/106.45); supports: 102.00 (strong) - 101.50 - 100.90 (very strong) - 100.00. The scenario of falling can be cancelled only at steady trade higher than 105.00.

作者: Navsher Bartash,
ForexChief Currency strategist