Markets:
Global core bond trading was rather uneventful today. Volumes traded remain very low. The overnight improvement in risk sentiment resulted in a weaker opening for the Bund, but the selling pressure soon evaporated, making way for a cautious upward bias. Moves in both the Bund and the US note future were technically insignificant. The EMU eco calendar was empty. ECB Hansson warned about rather big potential consequences stemming from the risk of a trade war. The German yield curve bull flattens slightly at the time of writing with yields 0.2 bps (2-yr) to 1 bp (30-yr) lower. US yields decline by 0.5 bps (30-yr) to 1.5 bps (5-yr). Italian BTP’s continue to underperform on intra-EMU bond markets following this weekend’s local election gains for Salvini’s Lega party and their centre-right coalition partners. The 10-yr yield spread vs Germany adds 9 bps. Spanish and Portuguese spreads widen by 4 bps. The Kingdom of Spain successfully launched a new 10-yr Obligacion via syndication (€7bn Jul2028). The bond was priced to yield MS +55 bps, compared MS + 57 bps guidance.
USD/JPY tested yesterday’s lows during Asian dealings in the 109.40 area. Yesterday’s risk aversion didn’t continue, which was sufficient to put a short term floor under the currency pair. EUR/USD made a lacklustre attempt to stay north of 1.17. The dollar’s general good performance today pulled the single currency back towards 1.1660.
Sterling lost ground today, especially against the dollar of course. GBP/USD dropped from 1.3290 to 1.3250 currently. EUR/GBP reversed initial weakness with EUR/GBP back around 0.8810. The move occurred during the appointment hearing of Jonathan Haskel, who’ll replace BoE McCafferty in August. Haskel said “the first risk involved in raising interest rates would be if this is done too quickly, disturbing investment and borrowing plans by more than would have been expected”. He agrees with the broad direction of travel set out by the MPC. Haskel’s inaugural comments suggest that the hawkish wing of the BoE will lose one vote (McCafferty), potentially bringing the tally back to 7-2. At last week’s BoE meeting, the central bank was split 6-3 on whether or not to hike the policy rates. The dovish wing conquered.
News Headlines:
The Shanghai Composite stock index has tumbled a little more than 20% from its 2018 high entering a bear market. Both domestic (deleveraging reduces the liquidity available) as external (trade war) factors are threatening growth and prompted a significant market sell-off.
In the first half of this year, investment in Britain’s car industry has halved relative to the same period last year. The country’s motor industry lobby blames Brexit-uncertainty about the UK’s future relationship with Europe and urges PM May to keep the UK in the EU’s customs union.
EU trade commissioner Cecilia Malmstrom warns of the consequences for US companies and consumers from a tit-for-that trade war after Harley-Davidson’s decision to move some production out of the US. She added the EU was still rolling out its response to Trump’s trade tariffs. Provisional safeguard measures to shield the EU from a surge of steel and aluminium imports due to the US restrictions ought to be in place by mid-July.
In the US, Conference Board consumer confidence edged down a little (from a revised 128.8 to 126.4) but remains lofty. On the producer side, the Richmond Fed Manufacturing Index climbed from 16.0 to 20.0.
