Markets
Global core bonds are gaining modest ground today with US Treasuries outperforming German bunds. The German IFO current business confidence index increased from 103.6 to 103.8 in March, more than the expected 102.9. The forward looking subcomponent rose to 95.6, up from 94.0 a month before. The stronger-than-forecasted results weighed slightly on German Bunds. The German 10-yr yield edged higher to positive territory, albeit only temporarily. The German yield curve is mixed with modest changes between -0.4 bps (30-yr) and +0.4 bps (5-yr). US Treasuries initially took a breather during European trading after Friday’s rally. Fed governor Evans said risks from the downside scenarios loom larger than those from the upside ones, but repeated the strong current state of the US economy. As US investors joined trading, US Treasuries paired its intraday losses to gain ground at the time of writing. The US yield curve is steepening with changes varying between -4.2 bps (2-yr) and +1.6 bps (30-yr). Peripheral spreads over the German 10-yr yield are widening, with Italy (+ 6 bps) underperforming.
Global (FX) trading calmed down after Friday’s aggressive risk-off trade. The (trade-weighted) dollar is losing marginal ground. Investors are still extensively debating the risks to global growth and the meaning of recent global market movements, including a flattening/inversion of yield curves. Doubts are no longer limited to EMU or China anymore. US growth is also in question, making clear directional moves in the dollar or in other major currency cross rates less evident. Today, the focus turned on the German IFO release. In the wake of Friday’s EMU PMI’s, markets were prepared for the worst, but the IFO rebounded more than expected. It provided some relieve for European markets and for the euro. However, the rebound was limited. One (growth) swallow doesn’t make a summer. EUR/USD is trading in the 1.1315 area (compared to sub-1.13 levels on Friday and this morning). The IFO prevented further euro losses, but not much more than that. USD/JPY regained modest ground, but the rebound soon ran into resistance. The pair struggles to avoid drifting back below the 110-handle as sentiment on risk remains extremely fragile.
After a turbulent weekend for UK politics, the visibility on the upcoming steps in Brexit remain close to non-existent. UK PM May is facing a growing number of calls to resign. At the same time, Parliament might take control of the Brexit process this evening and hold a series of indicative votes on Wednesday. The EU warned that the likelihood of a no-deal Brexit is increasing. Despite the mounting chaos on Brexit, sterling held up quite well. The UK currency even reversed earlier losses. EUR/GBP is again trading in the 0.8560 area. Cable rebounded north of 1.32. The reason of the sterling resilience is not clear. Maybe some investors see Parliament potentially taking control as a larger chance on a softer Brexit. UK PM May might address Parliament later today. A Parliamentary debate is expected afterwards and MP’s are expected to vote tonight on which amendments might be retained for Wednesday.
News Headlines
The Turkish lira recouped some of the considerable losses at the end of last week. The currency was hit hard last Friday amid renewed global growth concerns and after a sudden drop in the central bank’s foreign exchange reserves. EUR/TRY closed at 6.51 before recovering to 6.37 today.
The IMF’s Deputy Managing Director David Lipton said the US/Sino trade conflict poses the largest risk to global stability. He added that (the build-up of) fiscal-stabilization capacity is necessary to respond to economic shocks in Europe (and in the US) to avoid continued over-reliance on monetary policy.
Theresa May would only table her brexitdeal to parliament for a third time, possibly as early as tomorrow, if there is a chance of getting enough support, her spokesman said. Meanwhile, the EU hardens its stance, saying it was ready for an “increasingly likely” crashing out scenario after putting in place basic temporary contingency measures.
