Markets
With US Treasury markets closed today, the focus was on Europe. Last week’s risk-off sentiment continued with first Asian equity markets and later European equity markets losing ground. China underperformed, returning after a week long holiday. Italy dominated the news again with a hard stance on its budget proposal, causing Italian bonds to plunge. Deputy PM Salvini, alongside French nationalist Marine Le Pen, sneered at the EU for its bureaucracy that pushes budget restrictions and open borders. The EU continues to repeat its intentions to reject the Italian budget proposal. It looks like both Italy and the EU are not backing down, causing serious agitation in financial markets. The Italian 10 year yield prints a multi-year record high (3.58%) and the spread over the German Bund widens back above 300 bps. Safe haven movements were in play. Core bond markets gained ground. The German Bund rallied higher but stabilized around noon. German yields dropped with changes ranging between -2.3 bps (2-yr) and -3.5 bps (10-yr), with the belly outperforming the wings. 10-yr yield spread changes vs Germany widen strongly in the peripheral countries with Italy (+20 bps) and Greece (+18bps) underperforming. Spain (+6bps) and Portugal (+6bps) share the bronze medal.
There was no meaningful data to steer currency trading today. The dollar traded with a positive bias, enjoying a steady flight to safety and brushing aside any of the very soft comments from Fed’s dove Bullard. The China led negative sentiment on Asian markets this morning pushed the yuan lower, before extending losses dramatically even after Chinese closing hours (USD/CNH currently at 6.93). That risk off climate produced some spillover effects to its European counterparts and the euro. Italy’s Salvini’s provoking comments towards the EU and “its enemies – Juncker and Moscovici” and the “speculative” financial markets were no help for the common currency either. Salvini even called upon European voters and said EU elections in May 2019 are a chance to “save” Europe. EUR/USD edged lower throughout the day and is hovering near intraday lows at 1.1465. The yen flourishes in current market conditions, trading at 113.30 USD/JPY.
Apart from some insignificant intraday volatility, the pound’s trajectory was rather uninspiring. After closing below the 0.88 area on Friday following a new squeeze of sterling shorts, EUR/GBP again tested the 0.88 figure in today’s mostly technical driven trade session. If anything, some sobering comments from the UK after last week’s upbeat assessment by EU diplomats of the brexit negotiations might have pushed sterling (temporarily) lower. The next few days will be important for brexit as talks enter into a key phase. Investors probably stay sidelined, hence today’s subdued pound movements. EUR/GBP is changing hands at 0.878, virtually unchanged from Friday’s close. Cable is losing ground as the dollar profits from the current risk off mood. The pair is trading at 1.305.
News Headlines
During an interview Bullard said little to alter its dovish reputation. The Fed governor doesn’t see much inflationary pressure for the US economy. He thinks wage growth is where it should be, downplaying the historical unemployment data, saying they “can’t take as much signal from it as in the past”. In his view, the policy rate doesn’t need to get a lot higher as its already close to neutral.
France’s PM Philippe will present the government’s resignation tomorrow morning. As is the custom in France, a new government will also be led by Philippe and should be appointed by tomorrow evening. President Macron opts for a clean start after Minister Collomb’s resignation last week.
