PLN: Defensive Mood Weighs On Zloty

• JPY outperforms headed into the NY crossover, with USD/JPY gapping lower at the open in response to the ruling coalition losing its upper house majority. Focus will be on whether Ishiba is able to stay in the PM role - while recent LDP PMs that lost their upper house majority have failed to hold office for much longer than two months - the split nature of the opposition means any stable alternative against Ishiba's leadership is unlikely for now.
• An uptick in volumes was responsible for a bid in GBP; with GBP futures seeing near 1,200 contracts trade inside three minutes (cash equivalent of over $90mln) for the best volumes of the session so far. This adds to the evidence that markets are building a base at the mid-July pullback lows of 1.3365 after last week's data which - while not ruling out an August BoE rate cut - has dented the pricing for sequential cuts later this year.
• NOK/SEK trades softer, with NOK among the poorest performers on the day. Softer crude oil prices are largely responsible and keep the recent rally highs of 11.9862 in EUR/NOK in focus for now.
• Datapoints are few and far between Monday and, with the Fed inside their pre-decision media blackout period, central bank speak is seen quieter also. Market interest picks up toward the tail end of the week, however, with prelim PMI data for July due Thursday as well as the ECB rate decision. 

Bund futures have consolidated this morning’s rally, currently +55 ticks at 130.10. Earlier session highs of 130.14 did not test resistance at the 50-day EMA (130.20), clearance of which is required to cancel the current bearish trend.

• There hasn’t been an overt headline driver for today’s EGB outperformance, but some have pointed to the latest EU-US tariff headline flow as a supportive factor. Progress on a deal remains limited, with the US eyeing a 15-20% baseline tariff and the EU preparing retaliatory options for a no-deal scenario.
• The German curve has bull flattened, with 2s10s back below 80bps for the first time in two weeks. 10s30s remains close to multi-year highs though, currently at 53bps.
• 10-year EGB spreads to Bunds are within 0.5bps of Friday’s closing levels, with the early rally in European equity futures fading.
• The Eurozone debt to GDP ratio inched up to 88.0% in Q1, up from 87.4% in Q4 2024 and 87.8% in Q1 2024.
• The ECB's Q2 SAFE survey suggests rate cuts are continuing to feed through into lending conditions and demand. However, near term prospects for business activity remain subdued.
• The remainder of today’s calendar is light, with focus on tomorrow’s Q2 BLS, followed by the July flash PMIs and ECB decision on Thursday. 

Gilts remain underpinned alongside wider core global FI markets, with hawkish weekend tariff reporting centring on the U.S. & the EU seemingly underpinning the move.

• Futures have struggled to push meaningfully beyond Thursday’s high (91.53).
• Fresh extension higher would eye the 20-day EMA (91.99).
• Still, bears remain in technical control at this stage, next support seen at Friday’s low (91.08).
• Yields 2-4bp lower, curve flattens, akin to moves in global peers.
• 2s10s and 5s30s remain tethered to ~75bp and ~140bp, respectively, consolidating a little below their ’25 highs.
• 10s ~1.5bp wider vs. Bunds, spread back towards 200bp, having not closed above that level since mid-June.
• GBP STIRS still around levels that we outlined in our pre-gilt open comment, showing 48bp of BoE rate cuts through year-end, SONIA futures flat to +4.0.
• Little of note on the UK calendar today.
• Flash PMIs, public finances and retail sales data are due this week, while BoE Governor Bailey will testify on financial stability matters.
• More widely, UK focus remains on the fragile fiscal situation, with reports suggesting that Chancellor Reeves will continue to resist the idea of a wealth tax, as some Labour Party MPs continue to push for the policy move.