Headlines
European equity markets traded lacklustre as strong drivers were missing. Currently most indices show minimal to modest losses. US equities opened with small losses too.
Czech, Hungarian and Norwegian inflation slowed in April. Slower inflation in these regions reduces the odds that central bank monetary tightening could start any time soon after years of interest rate cuts and measures to boost market liquidity.
It looks like the International Monetary Fund (IMF) will take part in the financing of Greece’s third bailout, Slovakia’s finance minister Peter Kazimir said at the EBRD’s annual meeting in Nicosia. The Greek 10-yr yield dropped to the lowest level since the 2012 debt restructuring.
The stability of Austria’s coalition government has been thrown into doubt following the resignation of the country’s vice chancellor and leader of the centre-right People’s Party. Early elections are possible. Austria’s far-right Freedom Party has led recent opinion polls, and came close to having its candidate elected as Austrian president.
Euro zone unemployment is higher than official data suggest, continuing to keep wage growth muted, a European Central Bank study showed, raising fresh doubts about whether the bank can start rolling back its stimulus measures soon.
The European Central Bank’s reluctance to raise interest rates is putting pressure on Sweden’s central bank to keep its own stimulus measures in place, the Riksbank has acknowledged, making it harder for policymakers to respond to rapid growth in the local economy.
Rates
Bonds gain ground in uneventful trading
Global core bonds eked out some gains today. Markets focussed on Trump’s latest policy move – sacking FBI boss Comey – amid an empty eco calendar. European stock markets started on a weak footing, but managed to limit losses. ECB president Draghi held the line of the April ECB meeting in his appearance before Dutch parliament and didn’t raise speculation about the ECB’s exit policy going into the June meeting.. An ECB study which states that the EMU unemployment rate is higher than officially reported and prevents upward wage pressure, caught some headlines and supported the Bund’s intraday momentum. Oil prices remain stuck below the $50/barrel level ahead of API inventory data. Yesterday’s EIA data suggest a drop in inventories after weeks of increases.
At the time of writing, the German yield curve flattened with yield changes ranging between +0.3 bps (2-yr) and -3.2 bps (30-yr). US yields decline by 0.6 bps (2-yr) to 2.2 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany 10-yr yield spread narrow up to 2 bps with Portugal outperforming (-4 bps) and Greece underperforming (+3 bps). Austrian bonds don’t feel pressure following the unexpected resignation of the vice-chancellor which puts the stability of the coalition government in doubt.
The German Finanzagentur tapped the on the run 5-yr Bobl (€3B 0% Apr2022). Total bids amounted only €3.41B, below the €4.2B average at the previous 4 Bobl auctions. The auction had a 1 cent tail and the Bundesbank set aside €0.57B for secondary market operations, resulting in an official bid cover of 1.4 (real bid cover: 1.1). Today, the US Treasury continues its refinancing operation with a $23B 10-yr Note auction. Currently, the WI trades around 2.36%.
Currencies
Dollar holding up well, but rebound slows
Today was an uneventful trading session in the major dollar cross rates. US and European equities didn’t go anywhere. Yields declined marginally. The dollar rebounded since the start of this week and maintained a good bid. In technical trade, EUR/USD declined slightly further (currently around 1.0865/70). USD/JPY stabilized close to mostly slightly below 114.
Overnight, Asian equities traded mixed to mostly positive with Korea and China underperforming. The dollar traded marginally softer against the euro (EUR/USD high 1.08 area) and the yen (USD/JPY 113.80 area).
European equities opened in the red, but the decline was modest and soon a bottom was found. The moves in European equities and in yields were too small to give USD trading clear guidance. In technical, order driven trade, the EUR/USD cautiously extended the correction from Monday and Tuesday, but the pace slowed. USD/JPY hovered mostly in the high 113 area. The equity correction was also too small to have a meaningful negative impact on USD/JPY. In a speech before the Dutch Parliament ECB’s Draghi maintained a balanced tone. EUR/USD held near the intraday lows in the 1.0860 area, as the Draghi headlines hit the screens, but the reaction was negligible. EUR/USD trades in the 1.0865/70 area. USD/JPY is changing hands in the 113.90 area.
Awaiting the BoE policy decision
Sterling trading also showed no clear trading pattern. The limited decline in EUR/USD initially weighed also slightly on EUR/GBP. EUR/GBP dropped temporary below 0.84 but tries to regain this level late in the European session. Cable was better bid this morning, but a real test of the 1.30 area didn’t occur and the pair drifted back south later in the session. Maybe some squaring of positions ahead of tomorrow BoE policy decision (including inflation report) is in play. Cable trades currently in the 1.2935 area.
