Headlines
Most European stock markets trade near opening levels in an uneventful trading session. US stock markets also started unchanged ahead of the key US eco data later this week.
The US trade deficit shrank sharply in February, from -$48.2B to -$43.6B, as overseas customers snapped up American products and services, the latest sign US factories are benefiting from global economic stability.
The largest South-African trade union federation Cosatu, which is in a political alliance with the ANC, called for the president to resign over his "inattentive leadership" and failure to consult on last Friday’s cabinet reshuffle. President Zuma tried to ease market concerns by saying that the country’s policy orientation remains the same.
Euro zone sales increased by more than expected in February (0.7% m/m) as shoppers bought far more clothing than in January in a sign that consumers are still spending despite higher inflation.
Growth in Britain’s construction industry slowed slightly in March, adding to signs that the economy has lost some of its strong momentum of late last year when it defied the shock of the Brexit vote. The construction PMI declined from 52.5 to 52.2 while consensus expected a stabilisation.
A surge in consumer lending means British banks are at risk of incurring losses, the BoE said, warning that some might be letting credit standards slide as they compete to offer debt to households.
Rates
German bonds eke out more gains
German bonds continued their rally, albeit at a slower pace in a session with little eco data or events. Equities traded with a small negative bias, oil was a bit higher and peripheral spreads narrowed with the exception of Greece and Portugal. So, it is a stretch to call it a risk-off session. US Treasuries whose yields were marginally up also contradicted the risk-off character of the session. The euro area retail sales printed stronger than expected, but were ignored. The US trade deficit narrowed more than expected in February. Technicals may have played some role today. In the previous week, US Treasury yields fell substantially more than German ones and the 10-yr Treasury yield arrived at key 2.30% yield support. The Bund 10-yr yield on the contrary had still more space to decline, as it is still a bit further away from the key 0.20% yield support. So, technicals may explain the outperformance of German bonds versus US Treasuries. At the time of writing, the German yield curve bull flattened with yields 0.4 bp (2-yr) to 3.9 bps lower. US yields are 1.6 bps (2-yr) and 2.7 bps (30- yr). In the EMU bond markets, 10-yr yield spreads barely changed, with the exception of Portuguese and Greek 10-yr yield spreads which rose 5 and 8 bps. Regarding Greece, there were signals that the review of the Greek bailout would not be concluded at the next Eurogroup meeting.
Currencies
USD continues indecisive trading pattern
Today, FX trading was initially driven by a cautious risk-off sentiment. USD/JPY declined to the 110.30 area, but a real test of the recent low didn’t occur. In the risk off move, European yields declined more than US ones, weighing slightly on the euro. EUR/JPY touched a new correction low. However, for now, there is no strong enough driver to guide a uniform USD move. Markets await clear signs from key eco data expected later this week. USD/JPY is trading in the 110.55 area. EUR/USD hovers in the mid 1.0650 area.
Overnight, Asian equities showed a cautious picture after yesterday’s losses in the US. Japanese equities underperformed the region as the yen extended yesterday’s rebound. USD/JPY dropped to the mid 110 area. EUR/USD showed no clear trend. Euro weakness and USD softness kept each other in balance. EUR/USD hovered in the 1.0665/70 area.
European equities even opened with modest gains, but doubts lingered as equity futures signaled potential further losses in the US. Global core bond also suggested global investors caution. In this move, the decline in European yields contrasted with slightly higher US yields. It widened the interest rate differential in favour of the dollar. At least for now, widening interest rate differentials weighed on the euro. EUR/USD dropped to the 1.0636 area around noon. Selling pressure from EUR/JPY (USD/JPY) probably also weighed on the EUR/USD headline pair. USD/JPY filled bid in the 110.30 area, but last week’s low (110.11) stayed out of reach.
The intra-day correction eased as US traders joined the fray. The US trade deficit narrowed a bit more than expected. USD/JPY rebounded after the publication of the report. No reaction of EUR/USD. So, the reaction of USD/JPY was probably mostly driven by another factor (intraday decline of core yields slowed) rather than by the trade data. USD/JPY trades currently in the 110.55 area, well off the intraday low. EUR/USD is going nowhere in the 1.0650 area. We continue to keep a close eye at the US (10-y) yield which is testing key support levels (2.30% area). The fate of this this might also be important for the next move in the dollar (especially USD/JPY).
Sterling rally shows tentative signs of topping out
Today, the downward correction of sterling continued. Sterling faced heavy selling pressure at the onset of European trading. EUR/GBP jumped to the 0.8587 area. Cable dropped to the 1.2420 area. However, with only few eco data on the agenda, the move soon met resistance. The UK construction PMI was marginally softer than expected, but without impact on sterling. After the early morning repositioning sterling didn’t go anywhere. Cable hovered in the mid 1.24 big figure. EUR/GBP traded close to, mostly slightly north of 0.8550. Sterling shows tentative signs of a topping out process. Especially, for EUR/GBP confirmation is needed that a bottom is really in place.
