Markets
On Friday, the swings in core US and German bonds were moderate. US yields rose about 2 bp across the curve with the short end slightly outperforming. End of quarter positioning probably played a role. German Bunds outperformed with the very long end doing best (30-y -3.5 bp). A Reuters article suggested that the ECB is considering buying more long-dated bonds when reinvesting maturing bonds from the APP purchases. It also indicated that ECB, to some extent, could deviate from the capital key when reinvesting bonds. In the end, the article had little lasting impact on trading. Intra-EMU spreads narrowed.
This morning, the 10-y note gains gradual ground. Asian equities are losing momentum as the session proceeds. A decline in Japan Tankan confidence and a mediocre China Caixin manufacturing PMI highlight the risk of trade tensions filtering through into the economy. A (modest) rise of the dollar and the yuan again losing ground suggests that we might be heading for a risk-off session. Regarding the data, the US manufacturing ISM will be published. Consensus expects a small decline from 58.7 to 58.5. Markets will look for any fall-out from trade tensions. There might still be additional noise from the US tariffs/trade policy. (European) Bond traders will also keep an eye at the political developments in Germany. At the end of last week, there were tentative signs that, in particular US yields, might develop a short-term bottoming. However, a risk-off context combined with ongoing ‘trade noise’ and political uncertainty probably will keep core US and German bonds well supported at the start of the new quarter.
On Friday, the euro enjoyed a remarkable short-squeeze after the announcement of a EU migration deal. In a broader perspective, the dollar rally also took a breather as global sentiment on risk improved, at least temporary. EUR/USD finished the day at 1.1684. USD/JPY understandably decoupled from the broader pause in the USD rally. The pair closed the session at 110.76. This morning, the risk-off trade supports modest USD gains. (DXY trade-weighted dollar at 94.75). The data (US manufacturing ISM) will probably only be of second tier importance for FX trading. Global market sentiment will probably be the main driver. The combination of risk-off (amongst others due to lingering trade tensions) and ongoing political uncertainty in EMU might be a negative for the euro and supportive for the dollar. First short-term resistance in EUR/USD comes in at 1.1720 ahead of the key 1.1851 correction top. For now we maintain the working hypothesis that it won’t be easy for the euro to regain that area short-term.
On Friday, the initial euro short squeeze also propelled EUR/GBP above the 0.8850 range top. However, during the day, sterling gained some support as ONS revised upward the Q1 UK GDP from 0.1% Q/Q to 0.2% Q/Q. EUR/GBP finished the day at 0.8847. Today, UK Manufacturing PMI is expected to ease slightly from 54.4 to 54.0. Usually, a risk-off context isn’t GBP supportive. However, a euro decline due to European/German political uncertainty might also be a slightly negative for EUR/GBP too. So, for now, the break of the 0.8850 ST range top isn’t confirmed yet.
News Headlines
On Sunday the German interior minister, Horst Seehofer, rejected Merkel’s negotiated migration deal, saying it was “inadequate” and “not as effective” as his own proposal. Seehofer backpedalled on his initial decision to resign from both interior minister and CSU leader. Instead the party will now seek talks with Merkel’s CDU on Monday after which he would make his final decision.
The Chinese Caixin Manufacturing PMI edged lower from 51.1 to 51.0 as trade war concerns are weighing. The BoJ’s quarterly Tankan survey of business sentiment highlighted a cooling confidence among Japan’s large manufacturers with the index sliding further from 24 to 21 (vs. 22 expected).
Andrés Manuel López Obrador won Mexico’s presidential election on Sunday. He’s the first left-leaning (anti-establishment) head of the state in four decades. He promised to boost infrastructure spending, increase pensions and revive the economy, all in which the state is to play an important role.
