Fundamental Analysis

Sterling Supported by Somewhat Hawkish BoE Minutes

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Headlines

European equity markets gain moderate ground today, but are off intra-day highs in the wake of yesterday's WS gains. US equities open slightly higher.

The BoE held its benchmark rate steady, with one dissenter in favour of higher rates, but signalled that an increase may not be far off: "Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted".

US eco data printed close to consensus. The Philly Fed Business Outlook declined less than expected from a historically high 43.3 in February to 32.8 in March. Weekly jobless claims stabilised at 241k. Housing data were mixed with higher housing starts than forecast, but weaker building permits, a reversal from last month.

Norway's central bank kept its key interest rate on hold as expected, and said it expects to keep the deposit rate at 0.5% for longer than previously forecast, even while recognising that "persistently low interest rates may lead to financial system vulnerabilities". EUR/NOK rose from 9.10 to 9.15.

The Swiss National Bank highlighted continued global political uncertainty as it stuck to its ultra-loose monetary policy designed to stem demand for the safe-haven Swiss franc. The central bank is braced for the outcome of European elections this year which could trigger an upsurge in demand for the franc should nationalists perform well.

The Trump administration unveiled a "hard-power budget" plan that slashes spending at the Environmental Protection Agency by 30% and at the state department by 29%. Those cuts would help fund a huge increase for the Pentagon and the department of homeland security, which would see their budgets rise by 9% and 7% respectively.

The protectionist stance of the new US administration could complicate G20 talks this week and force policymakers to leave out the disputed trade issue, German FM Schaeuble told Reuters in an interview.

British PM May told the Scottish government "now is not the time" for a second independence referendum, saying it would be unfair for people to vote without knowing the conclusion of Brexit talks. Scottish First Minister Sturgeon has called for a referendum before the end of the two years of talks set out under Article 50.

Rates

FOMC gains partly erased; Dutch election relief

Global core bonds lost ground today with Bunds underperforming US Treasuries. Markets were relieved that Dutch candidate Wilders failed to win the Dutch elections, while they also lost some of yesterday exaggerated (?) post-FOMC gains. At the time of writing, the German yield curve trades 3.5 bps (2-yr) to 5 bps (30-yr) higher. The US yield curve bear steepens with yields 2.7 bps (2-yr) to 4 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal underperforming (+25 bps), perhaps in the run-up to tomorrow's rating decision by S&P (BB+, stable outlook).

Intraday, European equity markets started on a bright note. The relief rally after Rutte's Dutch election victory weighted on the Bund. US Treasuries partly returned some of the post-FOMC gains. After all, the FOMC still intends to accelerate its tightening cycle. Short term, key US yield resistance levels just proved to be a bridge too far. The acceleration of EMU inflation to the ECB's 2% inflation target in February was confirmed. US eco data printed near consensus (see headlines) and also failed to inspire trading. After opening losses, US Treasuries stabilized before Bunds. Deteriorating risk sentiment and declining oil prices eventually also put a floor for the Bund though.

The French treasury taps the on the run 3-yr OAT (€3.98B 0% Feb2020), on the run 5-yr OAT (€2.1B 0% May2022) and off the run OAT (€0.92B2.25% Oct2022). The combined amount sold was the maximum of the targeted €6-7B. The auction bid cover was 1.87, slightly below the average at French auctions. Additionally, the French treasury raised €1.82B via inflation-linked bonds. The Spanish debt agency sold the on the run 5-yr Bono (€1.67B 0.4% Apr2022), on the run 30-yr Obligacion (€0.67B 2.9% Oct2046) and two off the run Obligacions (€1.39B 1.3% Oct2026 & €1.08B 5.15% Oct2028). The total amount raised was near the upper bound of the €4-5B target range with a plain vanilla auction bid cover of 1.47.

Currencies

USD stabilizes after post-FOMC losses

Today, the dollar managed to stabilize versus euro and yen, following substantial losses in the aftermath of the FOMC decision yesterday eve. The USGerman yield differential was little changed today after narrowing yesterday. US eco data were close to expectations and thus largely ignored. European equities started strongly in the wake of WS gains, but eased, giving back half of the initial gains. Similarly, peripheral spread narrowing was soon erased. So, no full-blown risk-on session. EUR/USD moved in a 1.0710 to 1.0740 range and trades currently at 1.0730, 5 pips below opening levels. Aside of a brief dip lower at the European open, USD/JPY traded in the 113.20 to 113.55 range and is now quoted at 113.32, virtually unchanged from opening levels.

Overnight, Asian equities joined the post-Fed equity rally in the US yesterday eve. The dollar held near yesterday's lows. The decline of core bond yields and of the dollar supported equities. Commodities/commodity related assets also performed well. The BOJ left its policy rate (-0.1%) and the target level for the 10y government bond yield (0.0%) unchanged. The market reaction was very limited. USD/JPY traded in a 113.55/15 sideways range. EUR/USD maintained its post-Fed gains, trading sideways in a narrow 1.0720/45 range.

The Fed decision and the outcome of the Dutch parliamentary election (with a "bad" result for the far-right anti-euro PVV party of Wilders) caused a nice risk-on environment at the European open. Equities showed gains of 1% (or more). Core European yields gradually rebounded, contrary to the drop of US yields yesterday evening. Intra-EMU sovereign spreads narrowed modestly, but gradually lost gains. Even so, it didn't provide a clear driver for USD or euro trading. EUR/USD held a very tight range in the lower part of the 1.07 big figure. Post-Fed USD softness initially pushed USD/JPY briefly to the 113 area, but the rise in core yields and the equity rally propelled the pair back to the mid 113.50 area.

During the US session, the US eco data (see headlines) were again close to expectations. US Treasuries stabilized and US equity futures lost the Asian gains. In this context EUR/USD and USD/JPY meandered in their tight intraday range, but to its soft dollar side.

Sterling supported by somewhat hawkish BoE Minutes

EUR/GBP and cable held very tight ranges this morning as investors awaited the BoE policy decision. The BoE as expected left its policy unchanged. However, Kristin Forbes dissented in favour of a rate hike and the Minutes contained a note of concern on inflation. "some members noted that it would take relatively little further upside news on the prospects of activity or inflation for them to consider that a more immediate reduction in policy support might be warranted." This took sterling traders awry and triggered some frenetic sterling buying. EUR/GBP dropped from 0.8740 to about 0.8680, where a pause occurred. Cable jumped from about 1.2260 to 1.2360, prolonging yesterday's post-FOMC dollar triggered cable rally. The moves are technically insignificant, but a short term high in EUR/GBP (around 0.8790) may now be in place.

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Author: KBC BankWebsite: https://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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