Markets
Global core bonds gained ground today with US Treasuries outperforming German Bunds. Risk sentiment was again fragile this morning as hopes of a US-Sino trade agreement are fading by the day. Both sides are raising the stakes by searching for alternative ways to take action. Risk-off prevailed on global markets, with equities falling at the EU opening bell and core bonds finding new support. The eco calendar was of second-tier importance and printed too close to expectations to have a real impact. German Bunds traded in a tight range with a cautious upward bias. Italian BTP’s erased opening losses as the country’s (consumer and manufacturing) confidence both beat expectations. However, later on the day the EU confirmed that Italy is at risk of disciplinary measures. BTP’s lost again some ground. The German yield curve is moving lower with changes in the range of -0.1 bp (5-yr) to -1.3 bps (30-yr). The upward move in US Treasuries was more convincing. US Secretary of State Pompeo said the US “may or may not get a deal” with China, but remains very convinced that the US economy will continue to grow. At the time of writing, the US yield curve edges lower with yields losing up to -4.8 bps (2-yr). Peripheral spreads are tightening with Greece (-5 bps) outperforming.
As was the case earlier this week, EMU and US eco data were only of second tier significance for FX trading. The focus was on the developing trade saga. Both the US and China are putting additional ammunition in place to be used if the trade dispute would escalate. In this respect, the US Treasury’s foreign exchange report yesterday didn’t label any of its trading partners as a currency manipulator (yet). However, the US sharpened the criteria for countries to be placed on its ‘watchlist’. This move, combined with other recent decisions/communication suggest that the US wants a weaker currency and that it is prepared to take action if necessary. Of late the US currency lost significant interest rate support against most other majors as markets anticipate substantial Fed rate cuts further out. For now, this doesn’t hurt the dollar much as confidence in the likes of the euro remains fragile, too (e.g. due to uncertainty on Italy). Still the topic, on ‘what kind of strong dollar the US wants’, especially in case of less favorable eco conditions, will probably return to the spotlights in a not too distance future. For now, EUR/USD hovers in the mid 1.1150 area, within reach of the key 1.11 support. USD/JPY is changing hands in the 109.30 area.
No important UK data or major developments in the Brexit occurred today. Sterling is still trading within reach of recent lows against the euro and the dollar. EUR/GBP is changing hands in the low 0.88 area. The 0.88840 resistance survived again. Cable hovers in the low-to-mid 1.26 area.
News Headlines
Swedish GDP grew a stronger than expected 0.6% QoQ (2.1% YoY) during the first quarter of 2019. However, growth composition was disappointing. Exports were boosted but private investments declined and households even cut back on spending. The Swedish krona briefly strengthened but came back on its steps soon afterwards.
An EU official confirmed that the European Commission has sent a letter to Italy, stipulating the country has not made enough progress in reducing the budget deficit and debt level. Italy now has until May 31 to provide explanations which the EC will take into consideration in its assessment.
