Markets
Markets started the week in some kind of no-man’s land. Last week’s sharp decline in (US) yields despite higher than expected inflation has to be balanced against the Fed potentially signalling first (incremental) steps in the debate on policy normalization at Wednesday’s policy meeting. Today, there were no (US) eco data that could be a reason for investors to amend current positioning in any profound way. US yields are slightly off the correction lows touched last week. However, investors apparently still feel comfortable to run the carry along the US yield curve. US yields are rising between 1.2 bp (2-y) and 3.5 bp (5-y). European yields show a similar picture, ’rising’ up to 1.0/1.5 bp. The German 10-y yield holds below the -0.25% previous support. The broader US-driven decline in core yields and the ECB maintaining accelerated bond buying in Q3 hurt the technical picture for EMU yields. At 0.07%, the correction in the EMU 10-y swap is a bit more modest than in bund yields, but still significant. Risky assets continue to enjoy the combination of low yields and low volatility. European equities (EuroStoxx 50) again touched a minor cycle top. Intra-EMU spreads versus Germany are little changed, preserving last week’s narrowing gains. Oil (Brent) is extending gains north of $73. At least for now also this is no reason for any renewed inflation anxiety.
Lower US yields, with both real yields and breakeven inflation in a correction modus, usually isn’t associated with a stronger dollar. This also applies for low volatility and equities trading near record levels. Still the US currency succeded a nice rebound end of last week. EUR/USD this morning revisited Friday’s correction low below 1.21, but no follow-through price action occurred. EUR/USD is trading in the 1.2125 area. Next support comes in at 1.2052 (correction low, 38% retr. 1.1704/1.2266). The trade-weighted DXY index is losing a few ticks (90.45 area). The yen slightly underperforms with USD/JPY at 109.80 (vs 109.65 close on Friday). Recent decline in core (real) yields also supported a protracted comeback of the Swiss franc. EUR/CHF dropped below the 1.09 handle. The decline takes a breather today. Still the Swiss National Bank (SNB) will feel less at ease compared to the end March meeting. SNB’s Jordan has every reason to remind markets that negative rates are here to stay and that the currency remains ‘highly valued’ when it meets on Thursday. EUR/GBP is holding north of the 0.8566 support. UK PM Johnson is expected to announce a delay in the removal of restrictions planned for June 21. We doubt this will be a lasting negative for sterling. EUR/GBP trades in the 0.8590 area. Tomorrow, the UK labour data will be published.
News Headlines
Hungarian monetary council member Pleschinger further shaped the central bank’s possible monetary policy normalization process. He suggested a quarterly rate hike pace which coincides with quarterly inflation forecasts. He thinks the MNB needs to strike fine balance. “If we move too slowly, that can have serious negative market consequences, but if we move too fast then we can undermine economic growth, which is still fragile.” Pleschinger also indicated that the MNB’s 1-week deposit facility – which currently operates at a 15 bps spread over the base rate – would be abolished. The MNB meets next June 22. Earlier MNB comments suggested to send a strong signal from the start rather than using tiny changes. The MNB’s asset purchase programme is expected to continue running at least in the early stage of the tightening cycle. The HUF weakened despite today’s comments with EUR/HUF touching 351.
The EU mandated several banks for its inaugural NGEU 10-yr bond. The transaction will be launched tomorrow, subject to market conditions. Two more syndicated transactions are planned to take place by the end of July. The EC intends to issue €80bn of long-term bonds in 2021 and short-term EU bills to fund Europe’s recovery under the NextGenerationEU. The total package of some €800bn will be borrowed between mid-2021 and 2026, translating in on average roughly €150bn/year. All borrowing will be repaid by 2058.
