Markets:
Today, markets put aside the negative news headlines from early this week. The installation of an anti-establishment government in Italy, a no confidence vote removing Spanish PM Rajoy from power and US president Trump imposing import tariffs on steel and aluminum from Mexico, Canada and the EU all weren’t able to stop the risk rebound. Bunds and treasuries declined further. Spreads on Italian BTP also eased further. So, markets went into the US payrolls with a positive risk sentiment. After a disappointing April report, US payrolls were really strong. (223 000), the unemployment rate declined to the lowest level since 2000 (3.8%) and wage growth was also slightly higher than expected. At the time of writing, US yields are rising about 5 bps across the curve with the very long end outperforming (30y + 3 bps). However, part of the rise in yields had already occurred before the US payrolls release. German yields also extended their post-Italy corrective rise. The curve bear steepens with the 2-y up 2.8bp and 30-y rising 5.3 bps. Intra-EMU spreads over Germany narrowed further with 10-y Italy narrowing 19 bps. Portuguese, Spanish and Greek spreads respectively decline 15, 14 and 12 basis points. A constructive end to a difficult week.
The price swings in EUR/USD were modest today, especially taking into account the substantial moves in most other markets. EUR/USD traded in the upper half of the 1.16 big figure during the European morning session. The pair tried to regain the 1.17 level around noon, propelled by a further in easing Italy-driven stress on other (European) markets. However, the pair failed to really attack yesterday’s top. The US payrolls gave a small boost to the dollar, but also this move wasn’t able to break a first ST support area. Improving sentiment on Europe and strong payrolls for now kept each other in balance. EUR/USD trades currently in the 1.1675 area. The gain in USD/JPY was more significant as the pair profited from higher core yields and from a constructive risk sentiment. USD/JPY trades currently in the 109.65 area.
Sterling took a cautious start to today’s trading session. EUR/GBP tried to regain the 0.88 mark this morning. This was mainly a euro move as tensions on Italy eased further. The UK manufacturing PMI improved from 53.9 to 54.4 (53.5 was expected). However, the rebound was modest given the protracted decline since end last year. The details were mixed, too. Sterling gains immediately after the release were modest, but the UK currency finally gained some traction, both against the euro and the dollar. We see it in the first place as a correction on recent sterling weakness. EUR/GBP trades currently in the 0.8765 area. Cable rebounded to the 1.33 area.
News Headlines:
As expected, the Spanish prime minister Mariano Rajoy lost a vote of no-confidence with a small majority of 180 out of 350. He will be replaced by the Socialist opposition leader Pedro Sánchez. Sánchez could stay in power until 2020, but is likely to call new elections.
US-data surprised on the upside today. ISM manufacturing came in higher than expected (58.7 vs. 58.2 expected), reversing a modest roll-over since February. Payrolls were also better than anticipated with 223k additional jobs vs. a 190k consensus. The unemployment rate dropped further from 3.9% in April to 3.8% in May, whereas labor force participation edged lower to 62.7%. Average hourly earnings also topped expectations and rose 2.7% YoY.
A top aide to Kim Jong Un was en route to Washington Friday to hand a letter from the North Korean leader to President Donald Trump, Secretary of State Mike Pompeo said after reporting “good progress” in talks between the two sides to revive an on-again, off-again nuclear summit. (BB)
