Markets
Global core bonds booked small gains today, ignoring the further gradual rebound of European stock markets and positive sentiment on peripheral bonds markets. German Bunds outperformed US Treasuries. Disappointing German ZEW investors sentiment offers a plausible explanation, but the timing doesn’t fit. Both the current assessment and forward looking expectations component of the ZEW dropped more than forecast with ZEW referring to the global trade dispute with starts biting into German exports, the heightened risk of a hard Brexit and Germany’s fragile ruling coalition. Whatsoever, core bonds gained some momentum going into the US open. Moves are technically insignificant. US industrial production was too closely to expectations to surprise investors. US yields add between 0.5 bps (30-yr) and 1.2 bps (5-yr) at the time of writing. The German yield curve flattens with yield changes varying between+0.2 bps (2-yr) and -1.3 bps (30-yr). Peripheral yield spread changes vs Germany narrow by 5 bps for Portugal, 9 bps for Italy and 10 bps for Greece.
Market settings played in the advantage of the single currency today, with European equity markets gaining around 1% and peripheral spreads narrowing. The eco balance on the other hand lifted in favour of the dollar with marginally stronger industrial production weighing against weak German ZEW investor sentiment. Whatsoever, EUR/USD hovered in a narrow sideways range between 1.1570 and 1.16 for the largest part of the day. Things changed at the start of the US session as the trade weighted dollar gave away minor support (95; past trading day lows), lifting EUR/USD above 1.16 as well. USD/JPY is the exception to the rule today, settling back above 112, suggesting that positive risk sentiment is probably today’s main trading rationale. US stock markets opened 0.75% to 1% higher.
Over the previous days, the sterling rebound/short-squeeze halted. Markets saw the Brexit glass again a bit more half empty rather than half full as meetings/negotiations between high level EU and UK officials this weekend didn’t yield any progress. EUR/GBP yesterday rebounded above the 0.88 big figure. Even so, sterling losses remained contained. Markets apparently hope that a ‘last minute’ deal will prevent a disorderly crash from the UK out of the EU. Brexit headlines remained diverse today as stakeholders stick to their positions. Even so, sterling rebounded. The move was supported by higher than expected UK wage growth data (3.1% Y/Y vs 2.9% expected). It remains unlikely that the BoE will take further action until there is substantial progress on Brexit. EUR/GBP eventually made an intraday U-turn ahead of the US opening after EU chief negotiator Barnier warned that it could take weeks before a deal can be reached. European Council President Tusk sounded even more worried, saying that only new proposals by UK PM May can break the brexit impasse. Expectations going into this week’s EU Summit were already low, but now seem definitely buried.
News Headlines
Rating agency S&P is concerned about China’s “debt iceberg with titanic credit risks”. For years local governments were forbidden to raise debt, thus creating special financing vehicles (LGFV) to collect off balance funding. Most of this debt is held by small(er) local banks. S&P estimates the amount of ‘hidden’ debt in these LGFV’s at an “alarming” 60% of GDP.
The European Commission has one week to review Italy’s draft budget. Yet its President, Juncker, already hinted at a rejection, saying Rome’s spending intentions risk breaching the rules and that an approval could trigger a “revolt from other governments”. The EC could ask for amendments within two weeks.
