Headlines
European equity markets gained up to 0.75% with the Athens stock exchange outperforming after the reform agreement between Greece and international creditors. US stock markets opened slightly firmer as well.
Growth in the UK’s manufacturing sector unexpectedly rebounded in April (from 54.2 to 57.3), confounding expectations of a slide to push the PMI to a three-year high. The forward looking overall new orders balance rose sharply from 56.1 to 60.7.
The eurozone’s unemployment rate was steady at 9.5% in March, falling short of economists’ expectations it would improve to 9.4%. This kept the rate at its lowest level since May 2009, after a downward trend from 2013′s peak at 12.1%. The final EMU manufacturing PMI was marginally downwardly revised from 56.8 to 56.7.
The ECB will have to hold a discussion next month about its strategy for 2018 and the eventual exit from its ultraeasy monetary policy, ECB Governing Council member Ewald Nowotny said.
Czech PM Sobotka said he will submit the resignation of his government to President Zeman this week. The move follows last week’s comments by PM Sobotka that FM Babis may have engaged in "tax tricks or even tax evasion" as he built his empire, allegations that the minister has rejected. The premier said early elections were one option. A regularly scheduled ballot is set for October.
Rates
Greek assets outperform on reform agreement
Global core bonds lost marginally ground today in an uneventful session. This week’s back-loaded eco calendar keeps many investors at bay with Apple earnings (tonight), the Fed meeting (tomorrow), US payrolls (Friday) and a potential new vote on a health care bill in US congress lining up. At the time of writing, the German yield curve shifts 0.6 bps (2-yr) to 1.3 bps (10-yr) higher. Changes on the US yield curve vary between +0.4 bps (2-yr) and +0.9 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps and + 4 bps with Greece outperforming (-29 bps).
The Bund opened slightly weaker but trading flat lined afterwards. EMU eco data printed to close to consensus to trigger market reaction and the US eco calendar is empty. The initial move was some catching up with the US after yesterday’s European banking holiday. US Treasuries lost ground after US Treasury Secretary Mnuchin repeated that issuing bonds with tenors +30y was a realistic possibility.
Apart from the catch-up move, European stock markets reacted positively on the reform agreement between Greece and international creditors. Greeks assets outperformed today. The Athens stock exchange gained around 3% and Greek spreads vs Germany narrowed up to 40 bps at the front end of the curve.
If the Greek parliament approves the measures agreed with EU/IMF, the Eurogroup can rubberstamp a new aid tranche at its May 22 meeting, avoiding a Greek default in July when €6B bonds are due. Yesterday’s deal is also a first necessary requirement to get the IMF financially on board for the third bailout package and to start debt relief talks.
ECB Nowotny said that the ECB will have to hold a discussion about its strategy for 2018 and the eventual exit from its ultra-easy monetary policy at the June 8 meeting. "It is clear that the (asset–purchasing) programme has been and is a success. But on the other hand it is also clear that it must not become a permanent facility… That is the challenge we face," he added. "The longer such a programme continues, the more one must think about its consequences." Nowotny’s comments didn’t trigger market reaction, contrary to the ECB exit speculation we’ve witnessed after the March meeting.
Currencies
USD/JPY testing the 112.20 neckline
There were few eco data with potential to move the euro or the dollar. Especially EUR/USD again held a very tight range in the low 1.09 area. Greece’s agreement with international creditors and hawkish comments of ECB’s Nowotny didn’t help the euro. USD/JPY (currently 112.25). tries to regain 112.20 resistance. The pair is supported by an ongoing positive risk sentiment and slightly higher core bond yields
Overnight, Asian markets partially joined the tech-driven rally from the US yesterday. China underperformed as the Caixin manufacturing PMI unexpectedly declined to 50.3 from 51.2. USD/JPY stabilized in the high 111 area, near the recent correction top. EUR/USD still didn’t go anywhere in the low 1.09 area.
European equities also started the shortened week with a positive bias. Positive spill-over effects from the US were at play. Greece’s agreement with its creditors on additional reforms was also positive for sentiment on European markets. However, it didn’t help the euro. EUR/USD showed no dynamics at all and was locked in a very tight range in the low 1.09 area. ECB’s Nowotny in a press interview again indicated that the ECB might discuss the future strategy at the June meeting. However, these Nowotny headlines had little impact on the euro. Interest rate differentials between the US and Europe were also little changed. Investors apparently await more important US data/events later this week before engaging in directional bets on the dollar. USD/JPY profited from the rise in core yields and the ongoing risk-on sentiment. The pair returned to the 112.20 resistance/neckline.
There were no important data in the US. The focus for trading over there is currently on the corporate earnings for the first quarter. US indices remain at/within reach of record levels going into the results of Apple after tonight’s close. The dollar maintains a cautious bid. EUR/USD trades in the 1.0910 area. The test of USD/JPY 112.20 is ongoing (currently 112.25).
Sterling profits modestly from strong manufacturing PMI
Sterling remained under pressure early in Europe. The harsh comments from EU commission President Juncker on the Brexit negotiation after this weekend’s meeting of EU leaders caused some further follow-through sterling selling. EUR/GBP rebounded to the 0.8480/85 area. Mid-morning, the UK April manufacturing PMI came out surprisingly strong at 57.3 from 54.2 in March. The report suggests that the sector profits, at least temporary, from the post-Brexit decline of sterling and from better economic conditions in Europe and at other UK trading partners. Initially, the gains of sterling remained very modest, but the UK currency gradually received a better bid later in the session. EUR/GBP trades currently in the 0.8450/55 area. Cable is again trading in the 1.29 area. Of late, sterling performed quite well, even as there was no important news. In this context, sterling gains to the UK PMI might be seen as slightly disappointing for sterling bulls.
