- Caution reigns across markets ahead of risk events ranging from the FBI chief Comey’s congressional testimony to the ECB’s policy meeting and Britain’s election fever. The rally to safe havens including gold, the yen and Treasuries continues while stocks lost ground. Main European indices drop up to 1% and the US opens up to 0.3% weaker.
- April Eurozone retail sales came in at 0.1% M/M, below 0.2% M/M consensus while the April reading was downwardly revised from 0.3% M/M to 0.2% M/M. On a yearly basis, retail sales stabilized at 2.5% Y/Y.
- French President Emmanuel Macron’s party will have an absolute majority in the lower house of parliament, an Ipsos poll for France Televisions shows. If correct, this would defy widespread concerns that the political newcomer’s plans for economic reform would be blocked by a hostile legislature.
- South Africa’s growth contracted unexpectedly by 0.7% Q/Q in Q1 while the consensus had counted on a 1% expansion. All industries except agriculture and mining contracted in the first quarter, the statistics office said. On this news, the rand lost almost two points and tested the 12.9 USD/ZAR level.
- The debate in the Italian Lower House on the electoral law draft bill has started today. The draft bill could be passed by the Lower House assembly as early as the end of this week. The acceleration of the electoral law approval makes the scenario of early elections in autumn 2017 increasingly likely.
Rates
US yield support levels under severe test
Global core bonds gained ground today with US Treasuries outperforming German Bunds. Investors found their way to safe haven assets amid an extremely thin eco calendar (EMU retail sales 0.1% M/M in April vs 0.2% M/M consensus) and ahead of Thursday’s big events (UK elections, ECB meeting, Comey hearing). The developing tensions in the Gulf region prompted more cautiousness. European stocks lost up to 1%, while the Japanese yen gained on FX markets. US yields extensively test key support levels (2017 lows). Investors started doubting US president Trump’s pro-growth agenda since he tumbled from one political scandal into the other. US 5y5y forward inflation swap dropped from 2.4% at the end of April to 2.2% currently, matching levels from ahead of Trump’s presidential elections. US yields crumbled in lockstep despite the prospect of more near-term Fed tightening (June rate hike) and the probable start of the central bank’s balance sheet run-off in H2 2017. The US 5-yr yield tests 1.69% support, the US 10-yr yield dipped below 2.16% and the US 30-yr yield below 2.82%. The technical breaks aren’t confirmed yet, but merit attention.
At the time of writing, the US yield curve shifts 2 bps (2-yr) to 4.4 bps (10-yr) lower, with the belly of the curve outperforming the wings. The German yield curve bull flattens with yields 1.4 bps (2-yr) to 3.5 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrow up to 3 bps with Greece & Portugal underperforming (+4 bps).
The Austrian Treasury tapped the on the run 7-yr RAGB (€0.575B 0% Jul2023) and 10-yr RAGB (€0.625B 0.5% Apr2027) for a combined €1.2B, the maximum amount on offer. The auction bid cover was strong (2.2). The Treasury set aside an additional €0.18B of both bonds for secondary market operations. The Italian debt agency announced the launch of a new 30-yr benchmark (Mar2048) in the near future via syndication. The bond will likely be priced tomorrow.
Currencies
‘By default’ yen-buying dominates in uneventful session
There were no important data or other high profile news to guide FX trading today. The yen outperformed on investors caution ahead of the key event risks later this week. USD/JPY dropped below the 110 barrier and hovers in the mid 109 area. EUR/USD shows no clear trend. EUR/USD dropped to the 1.1250 area as investors are cautious to add euro longs going into Thursday’s ECB meeting.
Overnight, Asian equities traded cautiously negative with Japan underperforming. USD/JPY dropped below the post-payrolls lows, triggering additional yen buying. The pair fell below the psychological barrier of 110 and traded in the 109.70 area at the start of European dealings. USD/JPY’s decline also weighed slightly on the dollar against the euro. EUR/USD returned to the 1.1275 area, but the recent top stayed out of reach. The decline of EUR/JPY prevented further EUR/USD gains.
There were hardly any data or other news to guide FX trading in Europa. Investors caution prevailed ahead of the multiple event risks that might disturb trading later this week. European equities fell prey to modest profit taking. Core bond yields lost a few basis points, but interest rate differentials between the US and Germany/Europe were little changed. USD/JPY remained under pressure as investors preferred safe havens. The pair filled bids around 109.28 at the start of US dealings. Dollar weakness initially pushed EUR/USD within reach of the recent top, but no break occurred. On the contrary, EUR/JPY selling and investors adapting euro long positions ahead of the ECB meeting, finally pushed EUR/USD back south to the 1.1250 area.
Trading dynamics didn’t change during the US trading session. USD/JPY (109.35) remains in the defensive. EUR/USD hovers in the mid 1.1260 area. Waiting for Thursday remains the name of the game. Or will Trump surprise markets with a high profile policy initiative?
EUR/GBP holds within reach of recent top
There was also no clear story to guide sterling trading. The UK currency regained slightly further ground against the euro, but this move also mirrored a temporary setback in EUR/USD at that time. EUR/GBP dropped to the 0.87 area but soon found a bottom. There was no change in the election story. The Conservative Party maintains a (reduced) lead. Later in the session, some modest sterling pressure resurfaced. However, the moves were limited and technically insignificant. EUR/GBP is changing hands in the 0.8735 area. Cable hovers just sought of 1.29, awaiting the things to come in the UK, but also in the US.
