Market attention remains on China and the Fed

Moving on from Greece, market attention remains on China and the Fed. Following China's currency devaluation last week, the Chinese stock market remained very volatile this week, facilitating the downward pressure on global stock markets and commodities with Brent oil down another c.5%, just shy of its lows in January. 

Meanwhile, emerging markets, especially the currencies, are under remarkable pressure helped by the China story, Fed getting closer to the lift-up and domestic issues in certain EM countries. In this environment, bond markets have stayed resilient with 10 Bund rallying 7bp and 10y Treasuries and Gilt yields falling by 10bp. 

Somewhat weaker-than-expected US inflation data and relatively dovish July FOMC minutes have also helped the bond market strength this week.

"The recent fall in oil price will also likely to lead the ECB to lower its inflation projections in the 3 September staff projections. Furthermore, at 1.12, EURUSD is struggling to cheapen, especially during flight-to-quality episodes, partly because it is also a funding currency now", says Barclays. 

Lastly, with almost up to the 4y part of the German curve again trading below -20bp following the recent market rally, ECB is anecdotally pushing its QE purchases further out on the yield curve, not just in Germany but also in some peripheral issuers, which is making longer-end EGBs more resilient.