Headlines
European equity markets eke out gains with the French CAC40 outperforming (+0.7%), anticipating a Macron victory. US stock markets open narrowly mixed after a decent, but close to consensus, payrolls report.
Net US job growth increased by 211k in April, slightly beating 190k consensus. The previous two payrolls numbers were downwardly revised by a combined 6k. The unemployment rate unexpectedly declined from 4.5% to 4.4%, matching the cycle low from 2006-2007. Wage growth disappointed though, slowing from 2.6% Y/Y to 2.5% Y/Y.
Centrist French presidential candidate Macron extended his lead in the polls over his far-right rival Le Pen to 62% on the final day of a tumultuous election campaign that has turned the country’s politics upside down.
The Czech PM Sobotka has made a U-turn on his decision earlier this week to resign along with his government, saying he now aims only to dismiss his billionaire FM and political rival, Babis. Friday’s change of heart came after Sobotka met Czech president Zeman, who declined to accept the resignation of the entire government but only that of the PM.
Brent crude recovered today from a sudden 3% fall in Asian trade and following a week of steep losses globally as investors continue to worry about brimming crude inventories.
Rates
Commodity panic premature; payrolls non-event
What promised to be an exciting trading day, turned out to be a dull session on bond markets. Asian commodity-related panic proved premature and US payrolls printed too close to consensus. At the time of writing, the US yield curve flattens with yield changes ranging between +1.6 bps (2-yr) and -1.3 bps (30-yr). The German yield curve shifts 0.3 bps (2-yr) to 1.1 bp (10-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are unchanged apart from Spain (-5 bps), Italy (-8 bps) and Greece (-11 bps). Greek PM Tsipras told lawmakers to approve the deal reached earlier this week with international creditors. Greek parliament votes on the additional reform package on May 17.
The overnight panic on Asian markets because of significant weakness in oil and other commodity prices didn’t persist in European/US trading. Brent crude recovered, rising from a $46.6/barrel low to $48/5 barrel, but remains below key $50/barrel support. The US Note future erased Asian gains around the European opening and the Bund opened neutral. What followed was one stretched yawn into the payrolls with European assets slightly favoured above US ones as centrist French presidential candidate Macron extended his lead over Le Pen on the final campaign day. US payrolls were strong, although the wage component disappointed. The US Note future spiked lower on the release, dipping below 125-04+/03+ support (previous cycle high/38% retracement), but soon rebounded higher as the wage component primed. Markets soon found a new equilibrium even if the Bund marginally underperformed the Note future.
Currencies
Solid payrolls don’t help USD. EUR/USD holds near 1.10
The dollar was in the defensive in Asia this morning, but found a bottom in Europe as European markets were only modestly affected by the decline in commodities and the equity correction in Asia. The US payrolls report was solid, but it was not strong enough to inspire a genuine dollar rebound. USD/JPY trades in the 112.50 area. EUR/USD holds within reach of the 1.10 level, but a real test didn’t occur yet.
The ongoing decline in commodities weighed on Asian equities overnight. The risk-off correction supported the yen even as Japanese markets were closed. USD/JPY dropped to the low 112 area. The decline in commodities also kept the Aussie dollar (AUD/USD <0.74) and the Canadian dollar (USD/CAD >1.3775) under pressure. With the dollar and commodity currencies in the defensive, the euro was ‘by default’ outperformer. EUR/USD traded in the high 1.09 area.
European equities were also modestly affected by the risk-off/commodity correction in Asia, but the damage could have been much worse (loss of about 0.5%). The decline in commodities clearly didn’t trigger a broad based risk-off correction. Core bond yields also hardly declined. The easing of tensions put a floor for USD/JPY and for the dollar in general. USD/JPY found an intraday bottom in the 112.10 area early in Europe and rebounded slightly going into the payrolls. The dollar also regained some ground against the euro. EUR/USD settled in the 1.0955/80 area.
The US payrolls were OK. Job growth printed at 211K. (190K consensus). Other indictors of the report were a bit mixed. The unemployment rate unexpectedly declined from 4.5% to 4.4%. At the same time, wage growth was slightly disappointing at 0.3% M/M and 2.5% Y/Y. Over the previous days, USD sentiment was a bit fragile. So, the odds were that the dollar needed very strong data or other good news to gain ground. The initial reaction to the payrolls confirms this pattern. After an initial hesitation, USD/JPY settled in the mid 112 area. EUR/USD returned to the high 1.09 area, but a real test of 1.10 didn’t occur yet. The pair trades currently in the 1.0975/80 area. So, the feeling of a fragile USD sentiment persists. At the same time, the euro remains in good shape going into the second round of the French presidential elections.
Sterling resilient against a strong euro
There was no high profile UK news with impact on sterling today. The conservative party made good progress in local elections, indicating that PM May’s call for early elections will probably give her a comfortable majority at the start of the Brexit negotiations. As was often the case of late, sterling’s reaction was very modest, at best. Cable holds near the recent highs which maybe suggests a slightly positive impact on sterling. The soft reaction of the dollar after the payrolls also supports cable. The pair trades currently near 1.2950. EUR/GBP trades slightly off this morning’s top. The pair is trading in the 0.8485 area. So sterling holds up well against a strong euro.
