DB Research Early Morning Reid | Macro Strategy

Early Morning Reid - Macro Strategy

(STOXX Europe 600 @ 652 // +0.45%)

(iTraxx Crossover @ 251 // -9)

(Brent Oil^ @ 84.96 // +1.52%)

(10yr Treasury^ @ 4.69 // 0 bp)

(Dollar Index^ @ 100.02 // +0.42%)

(Further Fed hikes/cuts priced for 2026 @ 35 // -3 bp)

(Further ECB hikes/cuts priced for 2026 @ 40 // -2 bp)

^ - Change from previous day's 4:30 GMT to 04:30 GMT

*** A reminder that Peter published the July and YTD performance review yesterday here. In addition, Luke and Galina in my DBRI team published an interesting piece on what we can learn from the Situational Awareness episode that came to a head last week and the volatility in the KOSPI. Both events were symptoms of the same underlying condition: leverage in ETFs, margin accounts and hedge fund activity that was encouraged by more than a decade of low and stable rates. Indeed, reports that over 3% of Korea’s adult population received a margin call over the last few weeks are deeply concerning if true. When you add in a Fed that is trying to remove forward guidance, the report suggests that risks of increasing volatility in markets are building. See it here for more. ***

After several weeks of military exchanges and fears of a renewed energy shock, markets have started August welcoming the late weekend comments from President Trump that fresh talks with Iran would begin after he cancelled plans for what he described as a major attack. That optimism was reinforced by suggestions from Iranian officials that negotiations between Iran and Oman over “temporary” shipping arrangements through the Strait of Hormuz are progressing, offering a potential path towards improved oil flows. Even Trump’s post as Europe went home that “Iranian Leadership is unbelievably duplicitous”, which came following Iranian comments that they were not currently negotiating with the US, didn’t spoil things. Trump also said that his latest offer of talks was a “last

chance” for Iran but that didn’t derail improved market optimism on Hormuz shipping amid the renewed focus on diplomacy.

So for one day at least markets enjoyed something they haven't had much of this summer: falling oil prices, lower inflation expectations, stronger growth data, declining bond yields, and rising equities all at the same time. A nice way to start August even if you feel it could go either way very quickly.

The biggest move was in energy yesterday. Brent crude fell -4.73% to $83.77/bbl (adjusting for the benchmark month change), whilst WTI dropped -5.11% to $80.34/bbl. This morning, they are edging back +1.42% and +1.12% higher respectively. European natural gas futures also declined -1.80% yesterday.

The reaction in inflation markets was also strong. The US 1yr inflation swap fell -5.5bps to 1.86%, its lowest since September 2024, whilst the Eurozone 1yr inflation swap declined -3.3bps to 2.36%. So markets are dismantling a chunk of the near-term inflation premium that had built up through July as the conflict intensified. Real yields moved lower too, with the US 30yr falling -3.6bps to 3.00%.

Government bonds were immediate beneficiaries. The 10yr Treasury yield fell -5.8bps to 4.68%, whilst 10yr bund yields (-5.5bps) declined to 3.15%. Gilts outperformed both, with the UK 10yr yield down -9.6bps to 4.95%, making them one of the strongest-performing major developed market assets on the day and their best day since May 20. 10yr BTP yields (-8.6bps) weren’t far behind, also registering their largest daily decline since late May.

However, unlike several of the recent oil-driven rallies, yesterday's move wasn't occurring against a backdrop of weakening growth. In fact the opposite was true. The US ISM manufacturing survey rose to 55.6 in July, its highest reading since May 2022 and comfortably above the 53.9 expectation. The employment component (52.8 vs 50.0 expected) moved into expansion territory for the first time since September 2023, whilst new orders was strong (56.7 and in-line). Not even prices paid remaining at an elevated 71.1 (roughly in line with expectations, but easing back from 73.0) dampened the mood. The associated commentary suggested the booming activity was linked to semiconductors, AI, defence, and…