Markets:
Global core bonds traded directionless today, holding firm amid a positive risk sentiment. Asian and European equities eked out gains despite the collapsed trade talks between the US and China over the weekend and despite hawkish rhetoric from the EU side of the story. Italian BTP’s continued their positive run since the formation of a new government, but didn’t weigh on Bunds. The Italian 10-yr spread vs Germany narrowed by 15 bps to 215 bps, coming from a 290 bps peak at the end of May, but still significantly above levels from last month (114 bps). Spanish and Portuguese spreads narrowed by 12 bps. Disappointing EMU PPI data (0% M/M, 2% Y/Y) went unnoticed while the US eco calendar was empty. The marginal bear flattening of the US yield curve suggests that last week’s strong US eco data are still at work with next week’s FOMC meeting in mind. US yields add 1.6 bps (2-yr) to 0.7 bps (30-yr) at the time of writing. Changes on the German yield curve vary between +0.5 bps (2-yr) +1.8 bps (10-yr).
The risk-on correction from end last week continued today. Easing tensions on Italy and a positive investor reassessment on US/global growth were strong enough positives to outweigh lingering uncertainty on global trade. Strong US payrolls on Friday to some extent raised the probability of three additional Fed rate hikes this year, but didn’t support further USD gains. The further decline in intra-EMU spreads/risk premia supported the modest further short-squeeze in the euro. Investors probably also simply back-tracked on euro shorts that were set up during the Italian crisis during the second half of May. EUR/USD filled offers in the 1.1745 area at the start of US dealings, but the pair reversed part of the earlier gains during the US trading session (currently 1.1710). The swings in USD/JPY were very modest. The pair hovered around the 109.50 pivot. The small move in USD/JPY also suggests that the rise in EUR/USD was mainly a EUR/USD short-squeeze rather than anything else.
Sterling had quite a good run on Friday with EUR/GBP easing to the 0.8730/35 area. However, there was again no follow-through action on this sterling rise today. Euro strength prevailed. The UK construction PMI stabilized at 52.5, slightly better than the consensus estimate (52.0), but didn’t help sterling. EUR/GBP reversed part of Friday’s gain. The pair returned to well-known territory in the mid 0.87 area. The UK is said to come with the new plan on the Irish border in the run-up to the June 28 EU summit. For now, the story doesn’t impress sterling investors.
News Headlines:
Britain’s construction activity steadied in May according to the PMI (52.5 vs 52.0 expected) after a dismal start to the year, but new orders fell and companies grew more pessimistic about the outlook. (FT)
Czech real wages rose at their fastest pace in 15 years last quarter, rising 6.6% and adding to arguments that an interest rate hike may come sooner than anticipated. (Reuters)
UK PM May’s government is preparing to publish its plan to keep the UK under EU customs rules for longer as it seeks to break the Brexit deadlock, people familiar with the matter said. British negotiators expect to send the EU a document this week. (BB)
China’s door to talks is open in principle, the country’s Foreign Ministry said, a day after Beijing warned that any trade and business deals reached with Washington would be void if the US implemented tariffs. (Reuters).
