Markets
Global core bonds are losing ground today with German Bunds outperforming US Treasuries. Core bonds still profited overnight from US president Trump’s vow to raise and extend US tariffs on Chinese goods by Friday. Lower-than-expected German factory orders for March had limited to no impact. Little before EU openings, China confirmed Vice Premier Liu He will still travel to Washington on Thursday to continue trade talks, despite Trump’s renewed threat, causing core bonds to pair opening gains. However, the message was insufficient to turn sentiment around as EU equities moved lower and German Bunds moved higher throughout the day. German Bunds found new support as the European Commission cut its growth forecasts for the euro area, especially for Germany, and warned that the ongoing trade tensions threaten to make the outlook even worse. The German yield curve is moving lower with changes up to -4.4 bps (10-yr). With an empty US eco calendar and risk sentiment in today’s driver’s seat, US Treasuries tracked German Bunds today. The US yield curve is moving lower with changes in the range of -0.9 bps (10‑yr) and -1.8 bps (2-yr). Peripheral spreads over the German 10-yr yield are widening with Greece (+5 bps) and Italy (+4 bps) underperforming. The European Commission warned that Italy’s fiscal situation will worsen, as it forecasts economic growth at just 0.1% this year and a widening of the budget deficit to 3.5% of GDP next year.
EUR/USD wasn’t much affected by an overall negative sentiment today and hovered near 1.12 opening levels. The pair kicked off the trading session on decent footing, shrugging off disappointing German factory orders (0.6% MoM, -6.0% YoY), even eking out small gains in the low 1.12 area. EUR/USD returned to opening levels during (early) lunch hours as markets were awaiting the new set of spring forecasts by the European Commission. The downgraded growth projections were a chill reminder of the precarious economic environment, yet they didn’t come as a huge surprise. The euro lost additional ground vs. the dollar after the release and as US early birds digested the EC report but the move stays orderly. EUR/USD is filling bids at 1.118 at the time of writing.
EUR/GBP simply continued yesterday’s upward trajectory, thereby undoing all of sterling’s Friday gains. Markets were speculating on a sense of urgency in the minds of Theresa May and Jeremy Corbyn after their parties suffered heavy losses in local elections. However, an agreement had not yet been reached, May communicated today. But talks will resume in late afternoon, so keep an eye on headlines escaping the room. Negotiations will be wrapped up by the end of this week, with or without a deal. Meanwhile, markets are in wait-and-see mode, slightly scaling back bets on a positive outcome. EUR/GBP is currently trading at 0.857, up from 0.855. Cable is changing hands in the mid 1.30/31’s.
News Headlines
The European Commission cut the EMU growth forecasts for this year from 1.3% to 1.2% and for 2020 from 1.6% to 1.5%. This year’s German projection was slashed from 1.1% to 0.5%. Escalating trade tensions threaten to make the outlook even worse. The Italian budget deficit is now expected to rise to 2.5% of GDP and significantly breach the EU’s limit (3%) in 2020 (3.5%). The country’s debt ratio should by then be over 135% of GDP. The Italian statistics agency Istat suggested that the outlook may improve in coming months.
German factory orders disappointed in March, rebounding only by 0.6% M/M in March (vs 1.4% M/M forecasts) following a disappointing first two months of the year (-2.1% and -4% respectively). Total domestic orders slid 4.2%, compared with a 4.2% jump in export demand.
