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Investors seek safety as the dollar and franc rise amid tariff concerns
The US Dollar is making a comeback as it re-establishes itself as a safe-haven asset amid rising risk concerns. This rally is partly driven by fears about US trade tariffs and their possible effects on global trade.
The Dollar has outperformed the Swiss Franc, rising to just over 0.7970 against it. However, it has not yet crossed the important psychological level of 0.8000 and is still around 100 pips above the historic low of 0.7875 set last week.
Bessent discusses upcoming trade announcements, a 20% tariff on Vietnam, and the impact of stronger currencies on the deficit.
Scott Bessent announced that new trade developments are expected soon, with fresh offers already in hand. Upcoming tariff deals might exceed the current assessments from the Congressional Budget Office (CBO), indicating that higher tariffs are on the horizon.
These new tariffs aim to help reduce the trade deficit. Bessent also mentioned that while the US dollar weakens, other currencies are gaining strength. He has a meeting planned with a Chinese representative, which could foster greater cooperation.
Bessent’s plan for tariffs that exceed CBO forecasts shows a strategy focused on benefiting the US. It’s still unclear how other nations will respond to these changes.
This indicates a significant shift in trade policies, aimed at creating direct benefits for the US economy. Bessent’s focus on potential new tariffs suggests that current forecasts from the CBO might be outdated. We should pay close attention to policy details, especially regarding timing and scope. The underlying message is that existing estimates could quickly become irrelevant.
From our perspective, the arrival of new offers shows that preparations have started early. This isn’t about waiting to see what happens; it reflects proactive trading strategies ahead of decisions. Market participants may be starting to expect larger tariffs than anticipated. If confirmed, this could lead to rising pressure on US import and export prices, impacting consumer costs and corporate profits, particularly in sectors reliant on transport.
Another point to consider is the US dollar. If it continues to weaken, other currencies could gain strength, creating a challenging situation for those holding long dollar positions. Currency movements are interconnected. As Bessent noted, foreign currencies are moving in the opposite direction of the dollar’s recent trend. Those involved in leveraged foreign exchange trades may need to reevaluate quickly, especially if trade dynamics lead to escalation.
Bessent’s mention of an upcoming meeting with a Chinese official may seem like standard diplomacy, but in this context, it’s significant. Anyone connected to Asian trade flows should consider the chance of increased cooperation, which could lead to unexpected changes. These impacts often emerge in markets before traditional forecasts account for them.
We view Bessent’s emphasis on tariffs likely to surpass official forecasts as more than just talk. The impact will extend beyond macroeconomic data or broad market trends. Specific effects will be felt, especially by those in commodity markets or sensitive pricing sectors. Some players often misjudge the speed of implementation; however, given the groundwork already laid, it’s crucial to accurately measure risk exposure during this period.
Finally, Bessent’s comment about the uncertain global response is important; it’s a factor that cannot be relied upon for stability. The consequences of hesitance or retaliatory actions from other countries will be harder to manage once positions are established. We recommend monitoring bond market reactions and option premiums on country-specific exchange-traded funds (ETFs) for early signs of risk adjustments, as these often widen ahead of significant news.
OPEC+ plans to approve a 550,000 bpd production increase for September, sources indicate.
OPEC+ oil producers plan to increase oil production by 550,000 barrels per day in September. This decision was made during a meeting on August 3. The increase will return 2.17 million barrels per day from eight member countries, including Saudi Arabia and Russia.
Furthermore, the UAE will raise its output by 300,000 barrels per day because of its new production quota. Currently, WTI oil remains stable at $66, with a slight increase of 0.46%.
What is WTI Oil?
WTI Oil, or West Texas Intermediate, is a high-quality crude oil that is easy to refine. It serves as a benchmark in the oil market. Factors like supply, demand, political events, and OPEC decisions play crucial roles in determining WTI prices. Weekly inventory reports from the American Petroleum Institute and the Energy Information Agency significantly influence WTI oil prices. These reports show changes in supply and demand, with falling inventories typically leading to higher prices. OPEC’s role includes setting production quotas that greatly affect WTI pricing. OPEC+ includes ten non-OPEC members, such as Russia, which also impact the global oil market. The recent decision by OPEC+ to raise production quotas by 550,000 barrels per day in September isn’t surprising. Rising demand in recent months supports this move. This increase restores some of the 2.17 million barrels per day that eight participating countries had previously withheld from the market. With major players like Saudi Arabia and Russia involved, the decision reflects a response to stabilizing economic activity and seasonal demand that usually rises in the latter half of the year.The Impact of the United Arab Emirates and Market Reactions
The United Arab Emirates plans to add an extra 300,000 barrels per day to its production due to its new quota. This adjustment had been negotiated and signals a growing unity among the OPEC+ members. Despite the increase in expected supply, WTI’s spot price has increased slightly, remaining around $66 per barrel. This 0.46% gain indicates resilience rather than a strong reaction to the supply increase. Typically, news of increased supply leads to lower prices, but the market may have already anticipated these changes. The stability in WTI pricing suggests that market sentiment expects demand to remain strong, rather than facing an oversupply issue soon. As a light, sweet crude, WTI is sensitive to global cues and remains a key reference for oil pricing. Thus, keeping an eye on production signals from OPEC+ is crucial. Short-term WTI price fluctuations often stem from inventory data, provided weekly by the American Petroleum Institute and the U.S. Energy Information Administration. A drop in inventories generally leads to higher prices, while unexpected increases can cause immediate price changes. Given current market conditions, the importance of weekly reports is increasing. Traders should carefully monitor these inventory releases, especially as we approach late summer. This period usually sees refineries operating at higher capacity, and hurricanes may disrupt supply chains in the Gulf of Mexico. For traders involved in this market, adjusting strategies around these data releases can provide valuable insights ahead of major economic events or central bank announcements. Russia works closely with Gulf producers and has maintained steady cooperation with Riyadh’s policies, even amidst internal challenges or sanctions. Traders who overlook the strength of this alliance risk underestimating the support oil producers can provide. The coalition has shown that it can act swiftly to stabilize prices when necessary, as seen in previous cycles, and trading models should take this responsiveness into account. Moving forward, oil prices in the coming weeks will likely depend heavily on U.S. economic indicators and inflation signals that will influence the Federal Reserve. Energy hedging strategies for September and October should consider potential demand adjustments and weather-related logistical issues. Forward pricing structures may widen as autumn contracts incorporate producer reactions, especially if demand from Asia falls short or if European industrial activity weakens. This could lead to premium opportunities in WTI options on the call side, as long as implied volatility remains below recent averages. In summary, do not force a directional bias in trading. Maintain a flexible stance that allows for quick adjustments, particularly around mid-curve expiries where liquidity concentrations arise. Look for confirmations in inventory drops from the API and EIA. Pay attention to physical bottlenecks and the synergy between policy headlines and actual export data. That’s where today’s trading edge lies. Create your live VT Markets account and start trading now.Expectations for Trump’s tariff letters rise amid quiet session with few data releases
The European forex session on July 7, 2025, had limited new data. Key highlights included OPEC+ sources suggesting an increase of 550,000 barrels per day in September and the EU making progress in trade talks with the US.
With not much happening today, attention is on President Trump’s expected tariff letters. He might send out 12 to 15 letters to secure trade deals, with a deadline of July 9.
Impact Of Tariffs
These tariffs would start on August 1, adding another deadline to think about. Trump has a history of using such tactics for negotiation. For now, the market is steady, viewing this as typical unless there are major shifts in equity positioning. In simpler terms, during early trading hours in Europe on July 7, 2025, there wasn’t much new information. Two updates stood out. First, OPEC+ hinted that oil production could rise by around 550,000 barrels per day in September, potentially lowering crude prices, especially if global demand doesn’t increase. Second, the EU and the US are making progress in their trade discussions, easing some current uncertainties. The main market focus today is on President Trump. He is likely to issue multiple tariff notices before Wednesday’s deadline. These tariffs won’t start immediately but will be enforced from August 1. This tactic has been used before as a way to pressure trading partners for concessions ahead of negotiations.Market Reactions And Future Outlook
In short, markets know how Trump operates and are not likely to react strongly unless there’s a broader response, especially in US equities. Although the timeline is tight, it’s not urgent—more of a warning sign than an immediate threat. Right now, volatility is low, which keeps implied volatility readings modest and limits movements in derivative pricing. We are paying close attention to how this plays out with tariffs and how other markets respond. In previous situations, equity volatility has been the main driver for increased activity in FX, rates, and commodity options. Without that volatility, traders have little reason to change their long-term positions. Short-term options usually look past this kind of news unless they coincide with worsening risk sentiment. We’re not seeing the current pause as a sign of complacency. Instead, it reflects traders recognizing familiar patterns—a political tactic that might not lead to actual policy changes. Near-dated FX options are still calm, and with no major economic surprises expected soon, there’s little reason to push premiums higher. However, if the tariff letters include unexpected regions or industries, that could change things. Look for signs of stress in the forward curves. Small changes in skew may lead to quick shifts in pricing across sectors. Any deviation from usual sectors—considering beyond steel, autos, or agriculture—would require rapid adjustments. We’re preparing models for potential impacts, especially for markets tied to export-heavy economies as August approaches. As always, actual market flows are more telling than headlines. If we see unwinding in equity or commodity-linked positions, traders will likely seek protection quickly—first in equities, then rates, and FX. The calm won’t last if liquidity tightens. We are monitoring the situation closely. Create your live VT Markets account and start trading now.The S&P 500 faces challenges from tariffs and inflation but continues to show bullish momentum and upward trends
The S&P 500 is holding strong because there are no major negative factors affecting it. Recent job data is positive, showing lower wage growth, which is good for the market.
In the short term, risks include possible interest rate hikes, but these would need a significant CPI report to occur. The Federal Reserve’s current position suggests that the market will likely continue to rise after any temporary dips.
Two key issues are on the horizon: tariff negotiations and the upcoming US CPI data. Trade deals should be finalized by the August 1st deadline. The CPI numbers will be critical in keeping the current trend, with lower inflation being preferred.
Technical analysis shows that the S&P 500 is consistently reaching all-time highs. Buyers have a good setup near previous peaks, while sellers may aim for a drop to 6,000. The 4-hour chart shows an upward trendline, presenting buying chances for potential new highs, while sellers are watching for a drop to 5,800.
On the 1-hour chart, a minor upward trendline supports positive momentum. Buyers might push for new highs, while sellers will look for declines to 6,236 and then to 6,160. Key events for this week include tariff discussions and US Jobless Claims data.
This situation can be viewed in two ways: one that shows a steady upward movement in the index and another that points out emerging volatility—mostly minor, but sometimes significant.
The data showing strong job growth, with wages rising at a slower pace, keeps the market steady. Lower inflation without job losses suggests a smoother path for interest rates. Powell’s position indicates no rush to tighten policies, meaning any downward trends are likely to be brief and allow for recovery. Current dips don’t indicate major issues but rather an opportunity that buyers often embrace.
However, the upcoming CPI report is an important marker. If inflation data rises sharply, it could change expectations, leading to renewed concerns about interest rates and adjustments in pricing. The ongoing tariff negotiations could also cause significant movements. If no agreement is reached by the August deadline, it will quickly impact equity pricing. Treasuries would likely strengthen and risk sensitivity would increase.
Regarding levels, the previous high matters more than just symbolically. It’s where significant positions are set to be re-established. Short-term buyers have found support in specific areas defined by minor trendlines, with momentum building in those patterns. The 4-hour structure shows a smooth incline with strong support bounces. This is a textbook route to another high unless unexpected economic events occur midweek.
The 5,800 level is a crucial point to watch. If prices drop below this level quickly, especially during low liquidity times, it could trigger sell-offs. Until then, pullbacks are being met with swift buying. For sellers to gain ground, they need to push through overlapping technical zones that have been holding.
On the 1-hour chart, there is a weaker but relevant support line that might face pressure if traders hedge against CPI. Renewed selling does not require a major collapse; even a slight drop from recent highs to the 6,236 and 6,160 ranges could cool the buying activity. However, bearish movements have been weak so far, though this could change with a negative jobless claims report.
As the week progresses, the focus is on two key events. The market’s reaction to these events—trade headlines and the inflation numbers—will be important and won’t fade quickly. Pay close attention to the data around these events. Act based on the numbers rather than headlines, and keep an eye on volume during the initial reactions. Past experiences have shown that there can be misdirections, especially around CPI adjustments.
Stay vigilant about changes in volatility metrics, particularly in pre-market futures and implied skew. These indicators, more than news, will reveal where potential blind spots may be forming.
The EU announces promising advancements in US trade discussions, but actual progress is uncertain.
The EU and US are moving ahead with their trade talks, aiming to finalize an agreement by the July 9 deadline. Recently, Trump and von der Leyen had a productive phone call, signaling a potential shift in progress.
However, despite reports of advancement, the discussions have been slow over the past three months. With little time left before the deadline, it’s unclear if a deal can be reached. The outcome of these discussions will soon become clear as the deadline approaches.
Update on Transatlantic Trade Talks
This article highlights recent developments in trade discussions between the EU and US. The recent phone call between Trump and von der Leyen was seen as productive, indicating a possible momentum change after a standstill. While some news stories suggest progress, it’s important to consider that negotiations have been sluggish recently. As the July 9 deadline nears, crucial decisions must be made quickly, or efforts may fall apart. In the weeks leading up to the deadline, it’s wise to avoid getting caught up in political drama or headlines about “breakthroughs” unless backed by actual commitments or timelines. What may seem like progress might lack substance until firm agreements are reached by both parties. With the push for a deal, financial markets linked to geopolitical risks may feel increased pressure. Traders operating in sensitive sectors or broader indices should brace for volatility due to news and speculation.Market Volatility and Sentiment
If market players start to anticipate an optimistic outcome too early, especially with less liquid instruments or distant contracts, this could lead to unsustainable positions or sudden shifts when sentiment changes. We’ve seen this before: optimism builds around statements, only to see timelines pass, causing prices to drop sharply. As we approach July 9, we might see volatility increase, indicating market uncertainty about immediate results. This deadline is set by negotiators, not laws, so it could be extended. However, the possibility of an unresolved deal might trigger short-lived but sharp price changes. Watching the movement of FX options related to USD and major EUR pairs can signal market sentiment. If there’s a gap between actual and expected volatility, it can provide chances for hedging or opportunistic entries. Selling options might seem attractive, but without clear policy changes, sharp reversals can happen. Short-term positions now face more risks from headlines. We should review exposures daily; any significant statements from either side that go beyond vague hopes into specifics could really spike interest for institutions adjusting their risk. There may also be chances for hedging across related sectors in Europe and the US. Keep a close eye on conditional trades, and adjust your strategies to account for both direction and the speed of news changes. The situation has become more serious; timelines are tightening—any delays could need a solid explanation or risk unsettling sentiment further. Create your live VT Markets account and start trading now.Interest rate expectations show minor adjustments as central banks maintain or consider cuts without immediate changes.
Major central banks have not changed their expectations for interest rates as they await new economic data. The US Federal Reserve plans a total cut of 53 basis points by the end of the year, with a 95% chance of keeping rates steady at its next meeting. The European Central Bank expects a 26 basis points cut, with an 89% probability of maintaining current rates.
The Bank of England is projected to lower its rates by 55 basis points, with an 85% chance of a rate cut at its next meeting. The Bank of Canada may cut by 30 basis points but has a 72% likelihood of no immediate changes. The Reserve Bank of Australia is expected to reduce rates by 77 basis points, with a 94% chance of a cut soon.
Central Bank Expectations
The Reserve Bank of New Zealand predicts a cut of 31 basis points, with an 81% chance of holding rates steady for now. The Swiss National Bank anticipates a 9 basis points cut, with an 88% probability of no changes. Meanwhile, the Bank of Japan aims for an 11 basis points increase, with a 99% chance of keeping rates stable at the upcoming meeting. This section summarizes where major central banks stand on borrowing costs. Most are expected to cut rates by the end of the year but have no immediate plans to do so. Instead of a sudden shift, there’s a gradual movement toward easing. Central banks are likely waiting for economic data before making concrete changes. Although cuts are on the horizon, many are leaning toward keeping things steady for the moment. Japan is a clear exception, following its own course. It plans slight rate increases and shows almost total certainty of stability at its next meeting, taking a careful approach to normalizing its policy. Looking ahead, a few trends are emerging. While projections for terminal rates vary across regions, they all seem to follow a gentle trajectory without sharp changes. Short-term yields for major sovereigns are still heavily influenced by rates expectations. As long as central banks remain patient, we can expect minor flattening of implied rates. This won’t be a steep drop—just a slow easing of last year’s pricing pressures.Market Trends and Strategies
Volatility may quiet down unless an unexpected event occurs. With major meetings completed and most central banks signaling a wait-and-see approach, the immediate market drivers will likely come from inflation reports, labor market statistics, and growth indications. This means investors will focus more on how the actual data deviates from forecasts rather than the data itself. A surprising rise in inflation, for instance, could temporarily pause easing momentum, with the importance lying in the degree and persistence of that surprise rather than just one report. We’ve already factored in rate cuts to different extents, so any potential turbulence will likely stem from adjustments rather than new direction. If inflation doesn’t decline as expected, markets will need to prepare for a slower easing pace than what’s currently implied. On the flip side, weaker-than-expected activity could speed up rate cut expectations, especially affecting commodity-linked currencies and their associated yields. For our strategy, it’s crucial to maintain short-term hedges and avoid being overly confident in a single direction. Given that there’s a high likelihood of no changes in the next meetings, carry positions could yield modest returns in select currencies while being hedged against downturns. Skew should remain low, which supports neutral volatility positioning in the short term, unless data triggers a repricing. We don’t expect sudden disruptions but will monitor areas where rate cuts are heavily anticipated without supporting data. In those scenarios, any repricing could be sharp and one-sided, particularly beyond a three-month timeframe. In this market, discipline is critical in timing reactions. Allow the data to guide decisions. Ensure gamma is controlled, especially before major releases, and keep an eye on cross-market correlations, which may become more significant if rate paths diverge. Create your live VT Markets account and start trading now.UBS expects the ECB to cut rates in July, depending on the results of US-EU trade talks.
UBS expects the European Central Bank (ECB) to lower its key policy rates in July, a view not widely shared among others. They believe a change could happen if trade talks between the US and EU go well.
The ECB has suggested it will pause any changes this summer. Right now, market expectations show about a 90% chance that the ECB will keep rates the same at the July 24 meeting.
UBS’s viewpoint diverges from the general consensus. Most market participants expect no changes at the July meeting, reflecting a strong belief based on the ECB’s own communications and current economic stability. Policymakers are keen to maintain the status quo over the summer to limit volatility and take time to analyze inflation trends.
However, UBS sees a possible rate cut happening soon, not far in the future. Their reasoning is based on eurozone data and the potential resolution of trade talks with external partners, which could boost sentiment and business confidence. If these talks progress positively, it would give the ECB more reason to loosen policy sooner than the market anticipates.
If expectations change regarding these events, we could see significant adjustments in eurozone interest rate markets. For short-term futures and options, this means tighter pricing and increased sensitivity to any minor comments from ECB officials in the coming days. It’s not just the decision date that matters; any forward guidance shared in speeches or interviews will also be important.
Traders who have aligned their positions with the consensus—expecting no change in July—should reconsider if they have fully accounted for the alternative scenario that UBS proposes. This is especially important for strategies that extend beyond July into late Q3. At a minimum, those relying on stability in July may need to adjust their plans.
Christine Lagarde, the ECB President, has recently made strong statements supporting the pause. However, her assessment could change quickly if data or external factors evolve unexpectedly. Past experiences show how external events, especially in transatlantic relations, can significantly influence policy changes.
The current test involves not only inflation expectations but also the potential for positive momentum from US trade talks. If these negotiations hint at resolving issues constructively—possibly even before the ECB’s July meeting—what was once seen as an unlikely scenario could become more probable.
We shouldn’t take guidance stability as a certainty for inaction. There have been times when policymakers used periods of stability to set the stage for changes. Thus, if traders start considering UBS’s alternative scenario more seriously, swap markets and options could show different signals in the upcoming sessions.
Market movements in the next week may indicate whether the broader community starts to shift from the prevailing expectation of a July hold. If this begins, those tracking mid-curve volatility and rate differences over the next three to six months will gain early insights into changing sentiments.
We might be nearing a point where focus shifts from what policymakers stated in the last quarter’s press conference to what the markets think they are preparing for now. This could create uneven risk situations, especially when expected movements are confined to a narrow range. We’ll be monitoring this closely.
OPEC+ is expected to increase output by 550,000 bpd, with minimal impact on oil prices
OPEC+ is expected to approve an increase in oil production by about 550,000 barrels per day for September, according to a Reuters report. This change will return 2.17 million barrels per day that were previously cut.
The plan also includes a 300,000 barrels per day increase for the UAE’s production quota. This was anticipated, so its effect on oil prices should be minimal.
Managing Oil Supply
The article describes a careful move by the oil-producing group to gradually lift past supply cuts. Essentially, they are restoring around half a million barrels a day in September, following earlier plans to recover over two million barrels per day. The goal is to manage supply to stabilize the market without overwhelming it. The increase aims to maintain some control over prices and prevent disruptions. The UAE’s share of production is increasing by about 300,000 barrels per day, which was expected. Since there were no surprises regarding timing or scale, we do not anticipate an immediate impact on spot prices. The market seems to have factored this in already. For those trading oil derivatives, the key now is how these changes might affect future price curves. With September’s output mostly decided, front-month contracts may see little volatility unless something new arises. The focus should shift toward the longer-term, as traders adjust to new balances into the fourth quarter.Market Dynamics Focus
We should also pay attention to refinery margins and product inventories, particularly in areas where summer demand might drop. While the overall supply seems to be increasing, the actual effect on prices will depend on product stock levels and demand. Keep an eye on refinery maintenance schedules, as they can impact product output and shift demand for crude oil itself. In the coming week, price movements may stay steady unless new inventory data or geopolitical risks arise. Traders dealing with spread structures should be ready for changes between nearby and deferred contracts. With supply commitments clearer now, pricing will likely be influenced more by demand uncertainties and transport challenges. Watch floating storage volumes and shipping rates, as they can quickly impact physical markets. We also need to consider how economic data from the US and China influences the energy market. If economic reports are weaker than expected, demand forecasts may be adjusted, widening calendar spreads. Conversely, stronger-than-expected data might lead traders to price deferred barrels higher, especially with potential demand increases in winter. Overall, with the September production changes now known, the focus shifts to whether the expected volumes will actually be delivered. Export and load-out data from major terminals will indicate compliance or discrepancies. Differences in the physical market will provide clarity, and any gaps could create short-term trading opportunities, particularly for those involved in regional grades. The impact is likely to be felt more in contracts linked to physical oil than in major benchmarks like Brent or WTI, so refining margins and regional balances should remain in focus. Create your live VT Markets account and start trading now.Nagel thinks German fiscal policy will have a greater impact than tariffs, citing signs of economic recovery and growth potential.
A European Central Bank policymaker mentioned that Germany’s fiscal policy is expected to have a bigger impact than tariffs. There is cautious hope for the future, with signs of recovery in Germany.
This year, Germany might see a small annual growth increase. There is also encouragement for better integration of European financial markets. Surveys like PMIs and ZEW show steady improvement in the German economy.
Expectations for Germany’s future remain high, indicating continued positive trends. These optimistic outlooks give a hopeful perspective on the region’s economy.
This update suggests that Germany’s fiscal actions might have more economic influence than trade measures like tariffs. This means that government spending and investment decisions could better indicate short-term price changes in Europe than discussions around tariffs.
Nagel highlights a slight but notable rise in Germany’s annual GDP, supported by stable forecasts from indices like the ZEW and manufacturing PMIs. These indicators not only show improvement but also reflect strength in key industries, especially in industrial production, which has been slow since early last year.
When someone like Nagel stresses financial integration, especially during times of low inflation, the initial reaction might be to see it as mere policy talk. However, for traders dealing with EUR-based instruments, it suggests more than just ambition—it indicates less risk of fragmentation and a long-term alignment in capital flows. This aspect is vital when interpreting yield curve shapes and pricing changes across different regions.
We’ve observed the bund curve stabilizing, with the 5y-10y spreads showing slightly less inversion. This often occurs when traders believe growth will outstrip inflation moderation. This trend has been subtle but consistent, indicating that even without major ECB policy shifts soon, there is a preference for cyclical investments over defensive ones—at least in the rates market.
This trend is backed by steady strength in local surveys rather than just hard economic data. Traders shouldn’t expect massive quarter-on-quarter GDP increases, but consistency in forward indicators often leads to gradual positioning into more directional trades. There’s less demand for downside hedges in European equities, and at the same time, ATM implied volatilities for EUR/USD have eased back to mid-2023 levels, suggesting that macro uncertainty is lessening.
We’ve also seen leverage ratios in European banks rise again, albeit slightly. This change indicates that institutional borrowers and lenders in Germany are reassessing credit conditions. Expectations for yield convergence—especially in short-term BTPs compared to core German bonds—have also calmed.
For now, it’s more beneficial to analyze sovereign flow and private lending trends spreading from Frankfurt, rather than reacting too strongly to individual data releases. As differences in European economic trajectories shrink, foreign interest is returning to eurozone assets, including corporate debt and structured derivatives tied to regional indices.
In our view, we’re paying close attention to positions within swaps and rate futures. Flows have been somewhat directional but not aggressive. Many desks are merely reducing risk scenarios rather than betting heavily on a particular trend. This aligns with a market shifting from recession worries to a modest growth increase—low in volatility but still evident in implied rate movements.
So far, this recovery seems solid, at least in sentiment. This is reflected in changes in discount functions, with less divergence among major tenors. If this trend continues, derivatives based on Bunds and euro swaps may shift from protective structures to steeper trades, with expectations around the end of 2024.
