EUROZONE DATA: Current Account Shrugs Off Smaller Goods Surplus (1/2)

3-month EUR/USD x-ccy basis has drifted into positive territory since the end of June, currently just over 2bps and visibly diverging from 6/12-month (and longer) tenors. This divergence suggests short-term funding dynamics are likely at play (i.e. more demand for EUR funding vs USD funding on the margin). 

• The divergence has notably aligned with the latest raising of the US debt ceiling, which appears unintuitive since the resulting TGA rebuild is expected to sap USD liquidity from the market (and hence filter be reflected in a wider basis in USD’s favour).
• However, we’ve highlighted in recent posts that despite the ongoing TGA rebuild, bank reserve balances remain relatively steady around $3.3trln. That may be averting concerns around near-term USD funding pressure (though September quarter end will be a more important time to monitor these dynamics).
• Bill issuance related to the TGA rebuild is instead being absorbed through reduced ON RRP usage. It’s possible that some hedging dynamics amongst foreign repo agents have shifted during this process, which may be feeding through to the front of the x-ccy basis curve, but it’s difficult to find concrete evidence in favour of such an argument.
• Instead, some desks have highlighted recent increases in demand for long EUR spot positions, which need to be funded on an overnight basis and are consequently pushing up relative EUR funding costs.
• Danske Bank have written that “the market seems to extend the experience from last year, where trading over year-end in XCCY basis was smooth sailing, with tranquil credit markets and still overall relatively easy liquidity conditions. While this may be the right call, the outcome space, based on historical evidence, looks quite asymmetric. There is limited room for further tightening of basis over year-end, while plenty of room for a widening, should a shock hit the market, e.g. a sudden deterioration of risk sentiment and widening of credit spreads”
• They go on to note that “we think the EFFR-ESTR pricing for the rest of the year looks about fair and considering the tight basis over year-end, we see a good case for EUR-denominated investors hedging USD-assets extending maturing EUR/USD FX swaps over year-end”.

• e-mini S&P pulls back to touch a new daily low through the London close at 6439.00 - before markets stabilise off lows. Tech is notably underperforming: NASDAQ is leading the decline, with S&P 500 now in negative territory - although the DJIA holds small gains.
• Of note, Russell 2000 futures have come off highs, but are generally seeing a much shallower pullback relative to the larger cap indices.
• The NYSE Tick Index shows evidence of a sizeable sell program going through at 1101ET/1601BST - with 872 names sold on the downtick, the largest since Thursday last week and the response to the higher-than-expected PPI print.
• Megacap tech stocks look to be leading declines - Netflix, Alphabet and Meta Platforms are dragging the communication services sector lower, while soft semiconductors and chip names (NVIDIA, AMD, Oracle) drag the IT sector with them.
• Bloomberg's S&P 500 excluding the 'Magnificent 7' is still higher by 0.2% on the day, while trading lower by 0.2% when including those names.
• Supports to watch remain 6399.62, the 20-day EMA, and 6275.86, the 50-day EMA.

Belgium has announced it will be looking to sell the following at its auction next Monday, August 25:

• the 3.00% Jun-33 OLO (ISIN: BE0000357666)
• the 2.85% Oct-34 OLO (ISIN: BE0000360694)
• the 3.50% Jun-55 OLO (ISIN: BE0000361700)