Markets:
Global core bond trading was volatile today. The first move of the day was a leap higher in which the Bund outperformed. The move was the mirror image of a setback in Italian BTP’s after two Eurosceptic Legia lawmakers were tapped to lead key Italian parliamentary committees that deal with economic policy. Italian FM Tria repeated Italy’s commitment to the euro today. Tuesday night’s German-Franco deal, which includes a vague proposal to make it easier to restrict EMU bonds from troubled countries, gradually gains traction as well and might have negative implications for EMU sovereigns. Today’ weakness in BTP’s was probably again exaggerated by overall low volumes. Once the move burned out, core bonds stabilized. The second significant directive move was a down leg, inspired by a sell-off in UK Gilts following a hawkish BoE meeting (see below). The Bund and US Note future managed to hold on to some of the early gains though and received a new in push in the back following the release of a disappointing June Philly Fed Business Outlook (19.9 from 34.4 vs 29.0 exp.). US weekly jobless claims, which continue to hover near all-time lows, couldn’t cushion the blow. The US yield curve bull flattens at the time of writing with yields 1.7 bps (2-yr) to 2.8 bps (30-yr) lower. Changes on the German yield curve vary between -2.1 bps (2-yr) and -3.4 bps (5-yr). 10-yr yield spread changes vs Germany widen by 10 bps for Portugal/Spain and by 19 bps for Italy.
EUR-USD. This morning, the euro remained in the defensive with Italy again in the forefront. Italian assets underperformed again after two euroskeptics were chosen at key places in the Italian parliament. EUR/USD tested the 1.1510 correction low but a break didn’t occur. Later, tensions on the euro eased. Early in US dealings, the dollar faced some headwinds too as the Philly Fed business outlook printed substantially softer than expected. Of late, markets were quite confident that the trade war didn’t have much negative impact on the US economy yet. It is premature to change that view on the basis of the Philly Fed release. Even so, it was enough to push some USD longs out of their position. At the same time, the market probably also felt itself to short euro positioned and EUR/USD was squeezed higher to the 1.16 area after the Philly Fed. USD/JPY also dropped back to the 110.30 area (compared to an intraday top near 110.75 before the start in Europe this morning). Is the USD rally losing some momentum?
GBP. The focus for sterling trading turned to the BoE policy decision. Sterling traded with a cautious bias going into the policy announcement. EUR/GBP hovered in a tight range close too, slightly below 0.88. The BoE, as expected, kept its policy rate unchanged at 0.50%. However, the vote was 3-6 (2-7 in May) as BoE Chief economist Haldane joined to camp for an immediate rate hike. The MPC also changed its guidance on when to start the reduction of the stock of asset purchases. The Bank will consider to reduce its balance sheet when the policy rate reaches 1.5% instead of 2% announced previously. The Bank sounded rather positive on recent economic developments and signaled some upward inflation risks. Even so, the BoE gave no clear hint on the timing of a next rate hike. Still, markets concluded that chances have risen for monetary policy to normalize sooner than expected. The market implied probability for an August rate hike rose from just below 50% to 68%. Sterling jumped higher. EUR/GBP trades currently in the 0.8730 area. Cable rebounded to trade well north of 1.32.
News Headlines:
Norway’s central bank kept its policy rate unchanged today, but stated that it expects to hike in September. The Norges Banks argued that the upturn in Norwegian economy is continuing, while inflation pressure is building. The news strengthened the Norwegian krone against the euro at a current EUR/NOK of 9.43.
