CHINA-EU: EU Preparing Responses To Rare Earth Restrictions: BBG

• 50,000 TYZ5 114 calls ref 112-27, appears to be sale initiated, still bid

• In the FI space, Bund futures remain below their latest highs and are trading lower as the contract starts the day on a bearish note. Key support and the bear trigger lies at 127.61, the Sep 3 low. A break if this level would cancel a recent bullish theme and confirm a continuation of the medium-term bear cycle. For bulls, a reversal higher would refocus attention on key resistance at 129.44, the Sep 10 high. First resistance is at 128.63, the 20-day EMA.
• A bull cycle in Gilt futures gapped lower on Friday extending the pullback from recent highs. Despite the sell-off, a bull cycle remains intact and a recent rally highlights a stronger corrective cycle. Note that the move higher has allowed an oversold trend condition to unwind. Price has breached initial firm resistance at 90.84, the Aug 28 and 29 high. A resumption of gains would open 92.06, the Aug 14 high. Initial support lies at 90.65 (pierced), the Sep 5 low.

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EXECUTIVE SUMMARY: 

• The Riksbank’s September decision will be a very close call between a hold at 2.00% and a 25bp cut to 1.75%. There are credible reasons to motivate either decision, and this is reflected in a split analyst consensus.
• We suspect the Board will be equally split (but don’t necessarily think that will be reflected in any formal dissents), with some members advocating for a form of insurance cut given a still-weak labour market and signs that the recent inflation uptick was temporary, and others preferring to wait for more data before determining if another cut is necessary.
• On balance, we lean slightly in favour of a cut given the dovish signals from some members in the August meeting minutes and recent inflation outturns, but have little conviction in this view.
• The September decision includes an updated MPR and rate path projection. If a cut is delivered, we don’t expect the September rate path to assign any more than a small (e.g. 1bp / 2bp) implied probability of another rate cut. Meanwhile, the policy statement guidance will likely suggest that this is the last cut of the cycle barring an unexpected deterioration in the data. On the other hand, a hold would see the current Q4 2025 rate path of 1.92% remain broadly appropriate, with the policy statement also re-iterating that the Board “still sees some probability of a further interest rate cut this year”.