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    European Session – Euro recovers as ECB not seen in a hurry to change QE rules

    The euro recovered above 1.11 versus the US dollar in today’s European Session after indications that the ECB would not change its QE rules in order to make its asset purchases more flexible.  Such speculation was hurting the euro; mainly that the ECB was preparing to change its QE rules in order to buy more peripheral bonds.  This was not substantiated and the euro managed to recover.

    Risk assets were strong again today, as most European stock markets were up by nearly 1%.  In addition, bond yields also fell as US 10-year Treasuries yielded 1.42% – not far from the all-time low just below 1.4%.  Safe havens like gold were also doing well, with the yellow metal trading at 1,338 dollars an ounce; moving towards it post-Brexit 2 ¼ year high of 1,358.

    Despite the positive risk appetite, the yen was also doing well as it kept dollar / yen pinned to 102.60.

    Overall financial markets appeared to be bracing for substantial additional monetary stimulus in the form of interest rate cuts and / or more Quantitative Easing.

    Oil was struggling as the US benchmark fell close to the $48 a barrel mark at 48.25.

    Pound / dollar recovered from yesterday’s drop to 1.32 after the Bank of England Governor Mark Carney said the Bank was considering stimulus during the summer.  The pound was buying 1.3332 US dollars.  A leading contender for the post of UK Prime Minister said that Article 50 would not be triggered this year.

    In economic news, Britain’s manufacturing PMI for June came in much better-than-expected at 52.1.  The expectation was for a reading of 49.9.  The survey was conducted before the June 23 referendum vote however and more high frequency indicators suggested that consumer confidence in the UK dropped sharply in the aftermath of the vote.

    Eurozone Markit Manufacturing PMI also rose to 52.8 during June from the 52.6 flash estimate.  Unemployment for the region dropped to 10.1% during May, down from April’s 10.2% rate.

    The day’s main news item was the ISM manufacturing PMI for June out of the United States.  The index came in much stronger-than-expected at 53.2 versus a consensus forecast of 51.4 and the previous month’s 51.3 reading.  The components of the survey showed broad improvement except for the prices paid category which showed a drop to 60.5 from 63.5 (expected and previous reading).

    In other data, construction spending in May fell by 0.8% month-on-month instead of rising 0.6% as analysts expected.  The previous month’s reading was also revised lower to show a drop of 2% instead of 1.8% originally reported.

    The US session was not expected to be particularly eventful in view of the long weekend because of the 4th of July holiday on Monday.  Cleveland Fed President Loretta Mester was due to speak on the economic outlook and monetary policy at 1500 GMT.

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