• Friday evening’s weakness in the Nasdaq filtered through in European equity trading with main indices losing up to 1%. US equities opened slightly lower again with Nasdaq underperforming (-1%). Big US tech stocks take the brunt of the beating.
• Theresa May faces a showdown with newly elected Conservative MPs today as the British prime minister desperately attempts to shore up her position after claims by former chancellor Osborne that she is "a dead woman walking". Sterling is again in the defensive with EUR/GBP testing resistance around 0.8850.
• Euro-area inflation is becoming less reliant on ECB stimulus, Executive Board member Coeuré said as he confirmed that policy makers are moving slowly toward an exit from their bond-buying program.
• The uncertainty generated by the UK’s snap election, which has paved the way for a minority government for the first time in two decades, poses a risk to Britain’s credit rating, according to Moody’s. They currently rate the UK as Aa1 with a negative outlook.
• PM Sipilä moved to dissolve the three-party ruling coalition after junior partner The Finns was taken over by its anti-immigrant wing, throwing into doubt the next steps in a process that has helped Finland battle back from an economic slump.

Rates

Bunds outperform US Treasuries, but limited ranges

Global core bonds traded mixed today with German Bunds slightly outperforming US Treasuries. Friday evening’s correction on Nasdaq (low beta, high volume tech stocks) filtered through in European indices which lose around 1%. The German Bund profited from minor safe haven flows. Higher oil prices and positive sentiment on EMU bond markets balanced equity weakness to some extent. US Treasuries are marginally lower ahead of supply and Wednesday’s FOMC meeting. At the time of writing, the German yield curve flattens with yield changes ranging between +0.4 bps (2-yr) and -1.2 bps (30-yr). The US yield curve shifts 1.2 bps to 1.7 bps higher, with the belly of the curve underperforming the wings.

On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed around 2 bps but with some politically-related exceptions. Italy (-6 bps) and France (-4 bps) outperformed. Italian BTP’s gain momentum after Beppe Grillo’s 5SM anti-euro party’s lacklustre performance in local elections. French OAT’s got a boost from President Macron’s party’s performance in the 1st round of parliamentary elections which will lead to a landslide victory in the 2nd round with an absolute majority. Finland underperforms (+1 bp) after the coalition government collapsed. The coalition consisted the centre party (PM Sipilä), the liberal NCP and the extreme-right Finns. Yesterday, the Finns elected Halla-aho as their new party leader. He is known for his anti-EU and anti-immigration views and wants the Finns to prioritize these themes. PM Sipilä therefore decided, in dialogue with NCP, to dissolve the ruling coalition. He doesn’t pursue new elections, but will try to find a new majority in current parliament, eg with the Swedish People’s Party or Christian Democrats.

The US Treasury starts its mid-month refinancing operation today (exceptional timing due to Wednesday’s Fed meeting) with a $24B 3-yr Note auction and a $20B 10-yr Note auction. Currently, the WI’s respectively trade around 1.5% and 2.21%. The Treasury ends its refinancing tomorrow with a $12B 30-yr Bond auction.

Currencies

Dollar going nowhere as sentiment turns risk-off

The tech-driven equity correction and declining European political risk were today’s potential drivers for FX trading. Negative risk sentiment weighed slightly on USD/JPY. The pair struggles not to fall back below 110. EUR/USD basically held a sideways range, as more signs of European political stability protected the downside of the single currency and counterbalanced negative global risk sentiment. EUR/USD is going nowhere in the 1.1220 area.

Overnight, Asian equities markets felt some fall-out from the tech correction in the US on Friday. The impact on the major FX cross rates is modest. USD/JPY hovered sideways in the lower half of the 110 big figure. In France, Macron succeeded a major victory in the first round of the French parliamentary elections. He will secure a comfortable majority in the second round. However, the French election result didn’t support any significant euro gains.

There were no eco data with market moving potential in Europe. Macron’s victory and a disappointing result from the populist five start movement in the local Italian elections were intrinsically positive for European assets and for the euro. European equities opened with modest losses, but the tech correction soon outweighed the positive political news. The equity sell-off accelerated mid-morning. USD/JPY dropped below the 110 barrier. The downside of EUR/USD was rather well protected. Peripheral spread narrowing signalled ongoing positive underlying sentiment on the region. The euro was also supported by comments from ECB’s Coeure who said that EMU inflation has become less reliant on ECB stimulus. There were no market relevant data in the US. USD/JPY tried to regain the 110 barrier, but new weakness in US stock markets prevents that. EUR/USD trades in the 1.12 area.

Political uncertainty keeps sterling under pressure

On Friday, the post-election sterling sell-off soon slowed as PM May tried to convince the UK political scene that she could continue her Brexit strategy and remain PM with the support of the Northern-Irish DUP party. However, during the weekend and this morning, there were plenty of indications that it would be difficult for the UK PM to find common ground within the Conservative party on the kind of Brexit Britain needs. Speculation on a resignation of PM May and the fear for more political chaos triggered a new wave of sterling selling. EUR/GBP started a gradual, but protracted intraday uptrend and set a minor now 2017 top in the 0.8865 area. Cable dropped to the 1.2660 area. The sterling decline slowed during the US trading session, but there is no sign of any rebound yet. Sterling is holding very close to the recent lows against the euro (currently EUR/GBP 0.8850 area) and the dollar (currently cable 1.2670 area).