Headlines
European equity markets were hit by a buy-the-rumour, sell-the-fact reaction after Macron won the presidency. The CAC-40 which outperformed last Friday, underperformed now, with losses of about -0.9%. US stock markets opened nearly unchanged, while European equities are struggling off intra-day lows.
Cleveland Fed Mester said that the central bank should continue on its gradual path of raising interest rates to prevent the risk of overheating the US economy. Mester also repeated that she would like to see the Fed change its policy this year that keeps its $4.5 trillion balance sheet at a steady level.
EMU Sentix investor sentiment hit its highest level in almost a decade in May (27.4 from 23.9), improving more than expected (25.2) thanks to a strong assessment of the current economic situation and expectations that political uncertainty will diminish.
The ECB is close to replacing its negative view on whether the EMU economy will reach growth targets with a neutral one, and should adjust its policy guidance accordingly, ECB Mersch said. As growth picks up and labour markets tighten, inflation should also rebound, leading to a discussion about normalising monetary policy, he added.
Rates
European buy-the-rumour, sell-the-fact; US selling
A buy-the-rumour, sell-the-fact reaction following Macron’s presidential elections victory characterised European trading amid an empty eco calendar. European equities, the single currency and core bond yields slid marginally lower. ECB Mersch argued in favour of changing the ECB’s forward guidance in order to put in line with economic reality (good growth momentum, picking up inflation). Core bond topped out around the start of US trading and soon returned earlier gains even if Brent crude gradually drifted lower after failing to regain the $50/barrel mark. The US’ upcoming supply operation might have played a role in absence of eco data. The US Note future is once again testing 125-04+/03+ support (previous high/38% retracement). Cleveland Fed Mester confirmed her hawkish profile, warning for falling behind the curve. St. Louis Fed Bullard, the central bank’s arch-dove, plead again in favour of keeping interest rates low for a prolonged period because the economy suffers from the low productivity and low labor-force growth and as investors want safe assets.
At the time of writing, the US yield curve trades 1.2 bps (5-yr) to 1.7 bps (2-yr) higher. Changes on the German yield curve vary between -0.4 bps (10-yr) and +1.4 bps (2-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Italy underperforming (+5 bps; anticipating supply) and Greece outperforming (-12 bps).
Currencies
Euro falls prey to post-Macron profit taking
Markets corrected slightly from last week’s European risk-on trade today. The buy-the-rumour, sell-the-fact correction after Macron’s victory also caused a modest reversal on last week’s gain in the likes of EUR/USD, EUR/JPY and USD/JPY. EUR/USD tested the 1.10 level overnight, but returned to the mid 1.90 area. Also USD/JPY failed to regain the 113 level in a sustainable way. The pair trades currently around 112.75.
Asian risk sentiment remained constructive after Macron’s French presidential election, but equity gains were modest after all. USD/JPY opened north of 113 on Macron’s victory, but soon returned to the 112.75 area. EUR/USD reacted in a similar way. The pair opened north of 1.10, but returned to the 1.0960/80 area at the start in Europe. There was little (economic) news to guide currency trading. Good German order data suggested a good start to the second quarter, but didn’t help the euro. Markets recently largely anticipated a Macron victory. The Macron risk-trade even fell prey to modest profit taking and FX markets joined this correction trade. EUR/JPY, USD/JPY and EUR/USD all returned south, reversing part of their recent rebound. Interest rate differentials (US-GE) didn’t have any impact. If anything, they narrowed slightly in favour euro. EUR/USD dropped to the 1.0950 area. The setback in USD/JPY was modest. The pair returned to the 112.50 area. There were also no important data in the US. US investors initially joined the European FX trends. The euro remained in the defensive, but the pace of this morning’s correction is slowing. EUR/USD trades in the 1.0940/45 area. The downside in USD/JPY was better protected as US equities outperformed Europe and are holding within reach of the recent highs. USD/JPY hovers in the mid 112.50/75 area.
EUR/GBP captured by overall euro correction
According to the Halifax House price measure, UK house prices rose 3.8% Y/Y in the three months to April, unchanged from March. The outcome was marginally higher than expected , but remains at the slowest pace since May 2013, indicating some post-Brexit caution. The report had little impact on sterling trading. Trading in the UK currency was dominated by the global post-Macron reaction. EUR/GBP also corrected south and trades currently in the 0.8450 area. The decline of EUR/USD also weighted slightly on cable. The pair trades in the 1.2950/60 area. Later this week, sterling traders will gradually look forward to the BoE’s policy meeting. After the policy decision the BoE will also publish its quarterly inflation report.
