Headlines
European equities are trading firmer but gains remain small (0.33% EuroStoxx), except for Milan and to a lesser extent Madrid. US equities opened with gains of up to 0.5% (Nasdaq) as more quarterly earnings are coming in.
ECB Hansson (Estonia) said it is not too early to have a discussion on ECB policy. He doesn’t want to discuss changes to the issue and issuer limits of QE. The discussion on the QE exit is "mostly an issue of getting the timing right and looking at incoming data. At the same time, it’s too early to rush with concrete actions".
ECB Coeuré said the ECB is very, very serious about its forward guidance. It doesn’t want extraordinary measures to become permanent, but the ECB has to be convinced inflation is sustainable. He added though that the balance of risks is "by and large" balanced.
Inflation in the euro area has been confirmed at 1.5% Y/Y in March, dipping from the 4 year high of 2%, which had begun to raise concerns over an inflationary surge in the continent. Digging deeper shows though that energy, food and holiday packages, volatile items, were behind the surprisingly large drop and partly due to the timing of Easter.
Morgan Stanley brought down the curtain on a generally bright earnings season for the biggest US banks, announcing a 70% rise in net income compared with a year ago, that handily beat analysts’ expectations.
The UK government will have "no say" on the location of key EU agencies such as the bloc’s banking regulator or medicines agency after Brexit, the European Commission said. It is no part of the Brexit negotiations, but it is rather a consequence of Brexit.
Citing the March SESFOD survey the ECB said that liquidity for underlying collateral worsened while terms for secured funding and OTC derivatives worsened too. This suggests that the negatives of the ECB’s QE are increasing.
Rates
ECB survey highlights side-effects QE
Global core bonds lost some ground today, shrugging off overbought conditions. German Bunds underperformed European swap rates and US Treasuries at the front end of the curve. This Schatz/Bobl specific move occurred after the release of the ECB’s survey on credit terms and conditions in euro-denominated securities financing and OTC derivatives markets. The survey cited scarcity of high-quality short term debt, which is used as collateral in funding markets. So far, the ECB continuously stated that these markets were properly functioning. This survey for the first time highlights side-effects from the asset purchase programme. The front end of the German curve suffered after the release. The only eco item on the agenda was the final EMU CPI, confirmed at 1.5% Y/Y and ignored by investors. Risk sentiment on stock markets improved marginally (+0.2%) while Brent crude moved back above $55/barrel.
At the time of writing, the German yield curve bear flattens with yields 5.5 bps (2-yr) to 3.5 bps (30-yr) higher. Changes on the US yield curve range between +2.4 bps (2-yr) and +3.9 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed 5 to 9 bps for the non-core countries. Core spreads declined by 1 to 3 bps.
The German Finanzagentur tapped the off the run 30-yr Bund (€1B 2.5% Aug2044). Total bids amounted to €1.01B, below the €1.1B average at the previous 4 30-yr Bund auction and meaning that the auction was only just covered. The official bid cover was 1.2 as the Bundesbank retained €0.186B for secondary market operations (in line with average). The auction yield (0.87%) was the lowest since the end of 2016.
Currencies
USD decline slows, but no sustained rebound yet
Today, there were only second tier eco data releases. Core bond yields bottomed out after the recent decline and helped to put a floor for EUR/JPY and USD/JPY. The broader picture for the dollar remains indecisive. The tradeweighted dollar is holding within reach of the recent correction low. And EUR/USD hovers in the 1.0725 area, near this week’s high. So, there is no consistent indication across markets that the correction on the US reflation trade is over and a sustained dollar rebound is around the corner.
In a daily perspective, EUR/USD held an extremely tight range roughly between 1.0705 and 1.0740. The soft EMU March inflation was confirmed (see headlines), giving no any additional support to the euro. Core bond yields in the US and Europe rose a few basis points after a protracted decline of late. However, the US/German spread hardly changed, once more failing to give guidance for EUR/USD trading. The pair is going nowhere (currently 1.0720).
USD/JPY showed some tentative signs of bottoming out yesterday and on Monday, but also today. The modest rise in US yields was slightly supportive. European and US equities traded with a cautiously positive bias, given some downside protection for the likes of USD/JPY and EUR/JPY. However, USD/JPY still struggles to hold north of 109. A break beyond this week’s top (109.22) would be a first minor positive. Later today, USD traders will still keep an eye at the Fed beige Book, preparing the May 3 FOMC meeting. If the Fed maintains a constructive view on the US economy, it might put a floor on the USD setback.
Sterling holding near multi-month top
Sterling is holding near recent highs against the euro and the dollar. The UK currency jumped sharply higher yesterday, as UK PM May called for an early election on June 8. Markets see the prospect of May securing a bigger majority in Parliament as a factor of stability and potentially giving the UK PM some more room of manoeuvre in the Brexit negotiations. The jury is still out whether this will be the case. However, it was/is another reason for LT sterling shorts to be squeezed out of their positions. Today, the moves in cable and EUR/GBP were much more moderate, but there was no real correction on yesterday’s GBP rally. Cable is holding in the 1.2850 area. EUR/GBP is trading around 0.8350. The 0.8304 key support remains within reach even as the euro is better bid across the board.
