Markets:
Risk sentiment improved this morning as the US/North Korean Summit is back alive and as the worst case short term scenario on the Italian political scene was avoided. However, it soon turned out to be a sucker’s rally, as we feared this morning. More repositioning has to be done. Italian President Matterella’s veto halted 5SM-Lega’s coalition efforts, but risks strengthening their hand after new snap elections in September/October by giving them a stronger political mandate to pursue policies in conflict with E(M)U treaties rather than just fiscal stimulus. The Italian 10-yr yield spread added another 29 bps, hitting the highest level (235 bps) since the end of 2013. There’s no point in catching the falling BTP knife. Other peripherals suffered from spill-over effects (Portugal +18 bps, Spain +13 bps, Greece +12 bps). Even semi-core spreads widened (Ireland +6 bps, Belgium +4 bps and France +3 bps). Spanish political developments (see headlines) cause no specific underperformance. Any possible Spanish snap election doesn’t risk triggering a systemic European institutional crisis like in Italy. The German Bund played his role as safe haven. German yields decline by 4.7 bps (30-yr) to 6 bps (5-yr) with the belly of the curve outperforming the wings. Volumes were high even with UK (Spring Bank Holiday) and US (Memorial Day) markets closed. Next support for the German 10-yr yield kicks in at 0.3%.
EMU political event risk remained the major driver for trading in the major euro and USD cross rates today. European investors initially saw the glass half full. Italian assets rebounded and so did the euro. Markets apparently hoped that Italian President Mattarella vetoing the appointment of Eurosceptic Paolo Savona as Finance minister, would bring some calm to European markets. This hope was clearly in vain. The European risk-off trade resumed soon. The sell-off in Italian equities and bonds resumed. Bund are propelled by a new safe haven bid, interest rate differentials between the US and EMU/Germany widen further, resulting in ‘logical’ further decline of the single currency. EUR/USD traded in the 1.1730 area at the start of European dealings, but is again losing more than a full big figure. The pair is trading in the 1.1615/20 area. USD/JPY traded with a slightly negative intraday bias, but is holding north of the 108.85/109 support area. It will take till tomorrow when US markets are again fully operational to see which part of the safe haven flow away out of the euro will go to the dollar or to the yen.
UK markets were also closed today. EUR/GBP mainly followed the intraday price swings of the EUR/USD headline pair. EUR/GBP traded near the 0.88 big figure this morning, but tumbled in line with the global intraday euro sell-off. Scottish first minister Sturgeon in a meeting with EU Chief Brexit negotiator Barnier indicated that Scotland prefers to remain part of the EU customs union/single market. This debate illustrates the complex internal political situation that PM May faces domestically. However, the focus is currently on the euro issues, not on Brexit.
News Headlines:
The no-confidence vote to oust Spanish PM Rajoy, called for by opposition Socialists last week, will take place on Friday, according to leading Spanish newspaper El País. Ciudadanos’ leader Rivera said that they won’t back the no-confidence vote and issued an ultimatum to call snap elections instead. If Rajoy agrees to a ballot in fall, they’ll ensure an orderly end to the legislature, helping the final passage of the 2018 budget. If not, he’ll the votes in parliament for an election anyway (FT + BB)
Turkey’s central bank has decided to more than double its one-week repo rate to 16.5% from June 1, equalizing that rate with the current main funding rate and setting it as the new benchmark. That will bring monetary policy simplification to a completion after about two years of planning. Overnight borrowing and overnight lending rates will be set 150 bps below and above the one-week repo rate. EUR/TRY dropped from 5.5 towards 5.35. (BB)
