Euro rates are near the top of their ranges again. We don't expect the front-end to remain a driver, with now only a 30% chance of an ECB cut priced down the road despite remaining risks around the outlook. Dutch pension reforms appear to help push the 10s30s steeper as dynamics detach from the US curve
Global bond yields are pushing lower amidst a broader flight to safety, with Gilts leading the way. Even now, Gilt yields still seem high, driven by a hawkish Bank of England and a material risk premium. Gilt swap spreads were more sensitive to French turmoil than to dynamics in US Treasuries or Bunds, but this should change with more budget certainty
It's tough to envisage a hawkish 25bp cut, else why do it in the first place. A dovish 25bp cut is far more likely. If Chair Powell wants to be hawkish, then better to deliver a 50bp cut. Long rates are in a mood to go along with the "rate-cutting ride" and test lower too. But rate cuts plus (likely) rising inflation present an issue for long dates to deal with ahead
We don't think markets should dismiss another European Central Bank rate cut as eurozone inflation starts to drift below target. At the same time, the prospect of recovering growth – boosted by the German fiscal situation – should keep the back end anchored higher. We therefore see steeper curves in the near term
The week started slowly in the US and Canada as markets were closed for the Labour Day holiday.
Chinese equities hit a fresh three-year high, while India's Nifty 50 rebounded on Monday after President Xi Jinping and Prime Minister Narendra Modi attended a weekend summit in Shanghai alongside leaders from Russia, Iran and Turkey. The meeting focused on strengthening ties among emerging markets in the face of what participants described as aggressive US trade policies.
The euro’s outlook remains tied to developments on US tariffs and on Ukraine peace talks. EUR/USD took a hit late Friday after the Trump-Zelenskyy incident, but has rebounded since trading resumed on Sunday evening – perhaps on the news that Ukraine remains open to a mineral deal with the US and that the EU is actively trying to bring the US back to the negotiating table with Ukraine.
