• Pelosi rocks the boat. The Speaker of the House is about to set foot on Taiwanese soil to meet the president (tomorrow) and it’s very much against the will of China. Taiwan is a self-governing island but China considers it part of its territory. High-level meetings like these are viewed as supportive of Taiwan’s independence and meddling with internal matters. China repeatedly warned the US not to make the same mistake it did 25 years ago by sending then-Speaker Newt Gingrich on a similar visit. China threatened with “disastrous consequences” without detailing what those measures could be. It did ratchet up military activity around Taiwan in the meantime while the Taiwan president website underwent cyber-attacks this afternoon. The geopolitical saga got another angle after Russia sided with its southern neighbour, calling Pelosi’s trip provocative. It’s keeping markets on edge. European and US stocks drop 0.5 to 1%. Both US Treasuries and German Bunds attracted safe haven flows but the tide turned for the better as US dealers started joining. US yields cut their losses that went as high as 5 bps and now trade 1.8 to 7.9 bps higher in a flattener. The turnaround also helps support at 2.55% in the 10y yield survive. German yields were down almost 8 bps but bottomed out in lockstep with the US. Current moves vary between +2 bps (5y) to flat (30y). Here too an important reference that was tested earlier (0.73% for the 10y yield) survives the day. EMU swap rates in quite a sharp countermove reverse 5.1 bps losses to 1.7-5.2 bps gains. Despite the sudden intraday U-turn, short-term money markets continue to have ever more doubts on the ECB’s tightening intentions. The expected terminal rate today is less than half (<1.25% early 2023) of what was expected at the top in market pricing mid-June. It’s unclear to us how this can ever dovetail with the ECB’s own expectations of inflation next year averaging at an above-target 3.5% but it’s happening anyway.
• Two discernable developments on FX markets today. The Aussie dollar lags G10 peers following a third, consecutive 50 bps rate hike by the RBA. It’s the central bank’s slight tweak towards more focus on growth that prompted a sharp repricing in yields and thus the Australian currency. AUD/USD drops from 0.703 to 0.693. The Japanese yen marks the other side of the spectrum, profiting from the core bond yield declines. Support in USD/JPY at 131.25 was tested but narrowly survives at the time of writing. EUR/JPY extends its freefall to 134. The dollar was a bit hesitant at first, unable even to profit from risk-off just like yesterday, but then gained momentum. EUR/USD slips back to the low and very familiar 1.02 area. The trade-weighted index bounced off the 105 support zone (105.6). EUR/GBP is on track for the weakest close since April as sterling holds remarkably resilient.
• UK house prices in July rose at the slowest monthly pace in a year. The Nationwide Building Society price indicator advanced 0.1% m/m (est. 0.2%) to be up 11% y/y (est. 11.4%). The housing market boomed during the pandemic and values continue to be supported by supply shortages and very low unemployment, resulting in their longest run of gains for 8 years NBS explained. However, soaring inflation and rising mortgage interest costs are starting to ripple through. NBS chief economist Gardner expects the slowdown to continue as inflation could reach double digits towards the end of the year. In addition, the Bank of England is set to deliver the biggest rate hike in 27 years on Thursday. Both elements dampening price growth in the housing market are also affecting the UK corporate life. The number of companies filing for insolvency last quarter jumped by 81% compared to the same period last year as many of the government support measures over the course of last year ended. It was the highest number since 2009, UK’s Insolvency Service said. The majority of them were creditor’s voluntary liquidations (CVLs), ie. when company directors themselves decide to wind-up an insolvent company. But CVLs are often considered the first wave of insolvencies to arise, so things may get worse before they get better.