Markets:
Global core bonds are losing ground today with US Treasuries underperforming German Bunds. Risk sentiment remains fragile as investors are digesting more and more signals of a growth slowdown. Both US Treasuries and German Bunds set fresh peaks overnight. With the European markets opening, calm cautiously returned to markets, giving core bonds a downward bias at the start of the day. Confidence indicators for the eurozone disappointed in March while inflation data printed below, but close to expectations. German Bunds temporarily bounced back. Klaas Knot, governor of the Dutch central bank, warned the ECB for ‘tiering’, the idea to soften negative interest rates on financial institutions tabled by president Draghi yesterday. The German yield curve is moving higher with changes up to +1.4 bps (10-yr). US Treasuries declined throughout EU dealings, erasing overnight gains. This week’s jobless claims printed according to expectations while the Q42018 GDP result was downwardly revised to 2.2%. US Treasuries continued to lose ground, shrugging off some of the overbought conditions. Disappointing pending home sales couldn’t provide support. The US yield curve is edging higher with changes varying between +1.5 bps (30-yr) to +4.3 bps (5-yr). Peripheral spreads over the German 10-yr yield are mixed with Italy (+3 bps) and Spain (+3 bps) underperforming.
EUR/USD continued trading with a negative intraday bias today. The pattern was quite similar to previous days. The pair traded without a clear direction during the morning session in Europe. The dollar captured a better bid as US traders joined. Again we didn’t see much high profile news to explain the intraday swings. EC confidence was weak, but this was no surprise anymore after last week’s EMU PMI’s. German inflation was close to expectations. US Q4 GDP was slightly downwardly revised (from 2.3% Q/Qa to 2.2%) but jobless claims remained very low (211K). The latter might have been a slightly USD positive, but we assume that technical factors/end of quarter positioning were more important as a factor for USD trading. Interest rate differentials rewidened in favour of the dollar. EUR/USD is trading in the 1.1225 area. The 1.1187/1.12 support area is coming on the radar. USD/JPY also rebounded and is trading in the 110.65 area. We don’t draw firm conclusions and await the key US data next week.
Sterling gained modest ground as the UK parliament failed to approve any of the alternative Brexit options. Investors are awaiting the next potential step in the Brexit sage/drama. Headlines suggested that another debate/vote on May’s Brexit deal might take place on Friday. However, the process is highly conditional and there is no indication at all that the plan will have a majority in Parliament this time. We consider current sterling price action as erratic trading in an environment with little to no political (and economic) visibility. EUR/GBP is trading in the 0.8575 area. Cable dropped below the 1.31 handle, partially on USD strength.
News Headlines:
M3 money supply in the EMU stepped up the pace from last month’s 3.8% YoY to 4.3% YoY in February, beating 3.9% market estimates. The annual growth rate of loans to the private sector increased to 3.2%. Among the private borrowers, the annual growth rate of loans to non-financial corporations increased to 3.7% YoY (up from 3.4% in January) but with large differences intra-EMU (Germany, France +6% while Italy, Spain was flat or contracted).
IMF’s Lagarde urged the euro zone to build an EMU wide bank deposit insurance system to “unlock the full potential of the banking union”. A common deposit insurance is the last missing element of such a banking union, which already includes single supervisory and resolution scheme. But many (northern) countries are opposed given the asymmetric distribution of risk across the zone.
