Markets:
Risk sentiment improved today, strengthening our belief that yesterday’s panic selling was a short term exhaustion move. Investors adapted positions to latest Italian political developments and now await new impetus. Lega is steering to new elections, boosted by favorable opinion polls, while 5SM seems to be willing to do a last-ditch effort to form a government. The potential coalition partners seem to be drifting somewhat apart. Strong EMU eco data helped improving risk sentiment together with the short term relief in the BTP markets, supported by a decent (even if it was rather small) BTP auction. National inflation readings beat consensus by a wide margin, suggesting upward risks to tomorrow’s EMU measure (1.6% Y/Y expected from 1.2% Y/Y). EC confidence data, German retail sales and German labour market data surprised on the upside as well. German yields add 7.4 bps (30-yr) to 9.9 bps (5-yr) on a daily basis with the belly of the curve underperforming the wings. US yields increase by 6.1 bps (30-yr) to 8.2 bps (5-yr). 10-yr yield spread changes vs Germany narrow by 30 bps (Greece/Italy) to 16 bps (Portugal/Spain). Semi-core spreads decline by up to 5 bps (France).
Today, global trading entered calmer waters even as visibility on the political situation in Italy remains limited. Investors saw no additional negatives. After yesterday’s ‘exhaustion move’ this triggered a corrective rebound in most assets affected by the Italian risk-off trade, including in the euro. EUR/USD traded in the mid 1.15 area this morning and rebounded about 1 big figure. The EMU eco data, including German inflation (2.2% Y/Y!!!!!) were in theory also euro supportive. US data (ADP, US Q1 growth revision and trade balance) were mixed-to-softer than expected. However, the data had only a secondary impact on global FX trading. The moves in the FX cross rates are mainly a ‘post-Italy’ reaction. EUR/USD trades in the 1.1625 area, a good gain, but off the intraday top. USD/JPY was supported by the rebound in core/US yields. The pair returned close to the 109 area. Question remains whether the situation in Italy has stabilized enough for FX markets to turn their focus again to the economic data (e.g. to the US payrolls on Friday). The jury is still out.
Sterling recently followed the global price moves related to the Italian crisis and this was still the case today. EUR/GBP trended south as the Italian crisis weighed on the euro overall, but the pair didn’t break any technically important levels. Today, EUR/GBP followed the rebound in EUR/USD. The pair trades currently again in the 0.8750 area. Cable rebounded to the 1.33 area. However, the picture in this cross rate remains fragile.
News Headlines:
Germany showered the 19-nation euro area with a flurry of good economic news. Inflation in Europe’s largest economy jumped from 1.4% Y/Y to 2.2% Y/Y in May (vs 1.8% Y/Y consensus), exceeding the rate the ECB aims to achieve for the entire region. Unemployment fell to a record low of 5.2% and economic sentiment improved after three consecutive declines. Retail sales rose by an impressive 2.3% M/M in April, giving a boost to Q2 after a disappointing Q1 GDP. (BB)
The US private sector added fewer jobs than expected this month (178k vs 190k) while the figure from April was revised sharply lower (163k from 204k) as a tight labour market makes it harder for employers to fill positions. (FT)
Italy searched for a last-minute exit from almost three months of political turmoil, with 5SM looking to make a renewed attempt to form a coalition government with the right-wing League. However, League leader Salvini, who is surging in opinion polls, threw cold water on the notion, saying Italy should return to an election as soon as possible. He did, however, appear open to an interim administration to govern for a few months, saying an election at the end of July would be “disruptive” for Italian seasonal workers. (Reuters)
