Markets:
Trading started in risk-off mode today as boiling tensions on emerging markets got a grip on global trading. The sell-off in EM currencies like the Brazilian real, Indian rupee or Turkish Lire accelerated of late with central banks deploying their ammunition (rate hikes, interventions) to stop the rod. Most efforts remained in vain until now. Asian currencies and stock markets set the tone for significantly weaker opening of European stocks. Core bonds extended gains of the end of yesterday’s session, profiting from safe haven flows. Disappointing German and French April production data supported a Bund outperformance. Risk sentiment started improving around European noon as the pressure on EM currencies eased. Stocks and bonds made an intraday turnaround. The German yield curve bear flattens at the time of writing with yields 2.9 bps (2-yr) to 4.2 bps (30-yr) lower. An overnight effect exaggerates changes. US yields trade about 1.2 bps higher across the curve. 10-yr yield spreads changes vs Germany widen 2 bps with Belgium (+5 bps) and Greece (+16 bps) underperforming.
The dollar was in the driver seat on FX market, profiting from the unwinding of carry trades. The rally also slowed after European noon. USD/JPY was the notable exception to the rule, the yen being a typical outperformer in such market circumstances. EUR/USD moved lower in the 1.1830-1.1510 trading range following yesterday’s extensive test of the upside. The pair currently trades just north of 1.1760. Sterling initially took the upper hand over the euro, but fortunes for the queen’s money made a turn for the worse after EU Barnier shot down yesterday’s backstop plan by the UK. The border offer is short on answers to the EU’s questions. He stressed the importance of the June Summit to convince markets of an orderly exit. EUR/GBP is heading back to the 0.88 area at the time of writing.
The event calendar heats up next week. US President Trump and North Korean leader Kim Jung-un meet on Tuesday to discuss a denuclearization. The Fed is expected to raise its policy rate by 25 bps to 1.75%-2% on Wednesday. The new dot plot could show a hawkish shift in this year’s forecast and with regard to the neutral rate. The ECB flagged a debate on ending its asset purchase programme on Thursday, but will Draghi already inform markets or postpone communication to July? The Bank of Japan is expected to keep policy unchanged on Friday, but could be the biggest wildcard for trading if they hint on policy normalization.
News Headlines:
After German reports showed yesterday that manufacturing orders fell in April for the fourth consecutive month, Industrial Production (MoM) also disappointed with a decline of 1% in April from March (+0.3% expected). French factory data were also below expectations with a decline of 0.5% (+0.3% expected). Both results add to the evidence that the EMU economy is unlikely to rebound strongly after Q1’s slowdown.
US President Trump has responded to Canadian PM Trudeau and French President Macron’s criticism on US tariffs on steel and aluminium by saying Canada and France are too charging the US with large tariffs. He said “to be looking forward to straightening out unfair Trade Deals with the G-7 countries”. Macron responded that they are not afraid to sign a 6 country agreement.
UK Prime Minister May’s blueprint for avoiding a hard border between Ireland and Northern Ireland that she presented yesterday has been rejected by Chief EU negotiator Michel Barnier. stating that the proposal cannot apply to the whole UK, an element that is crucial to being acceptable to the UK.
