Headlines
The German Dax reached a new all-time high around the European market opening, but couldn’t cling on to gains. Other European indices also trade slightly lower. US stock markets opened around 0.3% higher.
The Empire Manufacturing business sentiment unexpectedly declined from 5.2 to -1 in May while markets expected a pick-up to 7.5. The index is now at the lowest level since October 2016.
ECB chief economist Praet said that "growth still needs a high degree of accommodation." The ECB will reassess its risk assessment in June. Currently risks are more balanced, but still tilted to the downside. Praet expects the output gap to be closed sometime in 2019. Inflation pressures remain subdued at this stage.
Emmanuel Macron has appointed centre-right politician Édouard Philippe as his prime minister. Mr Philippe, the 46-year old mayor of Le Havre, is a Republican party MP close to Alain Juppé, the former prime minister who lost the Republican party’s presidential nomination to François Fillon in primary elections last year.
Germany should use its rising tax revenues to invest in infrastructure projects that will enhance its growth potential, and encourage employers to raise wages to help lift euro zone inflation, the IMF said. The IMF recommendations run counter to the thinking of German FM Schaeuble.
Vladimir Putin has blamed US intelligence services for the WannaCry infection that has swept across the world, as the spread of the cyber-attack appeared to stall in Europe.
Rates
France announces new 30-yr syndicated benchmark
Global core bonds lost modest ground in dull session. Traded volumes were low, even for a Monday. Brent crude gained around $2/barrel as Saudi Arabia and Russia push to extend oil output cuts until March 2018. The higher oil price weighed slightly on core bonds. ECB chief economist Praet repeated that the EMU still needs a high degree of stimulus and that inflation is subdued. Economic growth is increasingly solid, broad-based, but the strong sentiment needs to be reflected in hard data. His comments failed to impact trading. The US empire manufacturing index unexpectedly turned negative for the first time since October last year, but received the same underwhelming receipt.
At the time of writing, the German yield curve bear steepens with yield changes ranging between 0.6 bp (2-yr) and +4.7 bps (30-yr). The underperformance of the very long end of the yield curve is supply-related. The French debt agency announced the launch of a syndicated 31-yr benchmark (May2048) in the near term. The US yield curve shifted in similar fashion with yields 0.8 bps (2-yr) to 2.3 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -2 bps and +1 bp.
Currencies
Euro rally continues
The euro remained well bid in today’s very thin technical and sentiment driven session. A second tier weak US Empire Manufacturing index gave the pair some extra, albeit temporary, fuel, but it was mainly follow through buying after Friday’s weak US data. Interest rate differentials were little changed at the short end, but narrowed at the longer end after the announcement of a fresh French long bond. Geopolitical tensions after the North Korean missile test and some ongoing ECB QE tapering speculation were often cited on news wires, but we think they had little to do with the euro strength.
EUR/USD started the European session on a positive footing and very gradually moved higher during the European morning session. The US NY Fed manufacturing survey disappointed as it dropped just into negative territory. EUR/USD added a few ticks and reached the 1.0980 level, up from 1.0933 at the opening. The pair seems to hesitate now that it nears the 1.10 handle and the 1.1023 recent high
USD/JPY goes nowhere
Following two down-days, USD/JPY tried to move higher at the start of the European session, but it never came further than 113.73 from 113.40. Later on, disappointment kicked in and dollar selling pushed the pair back to the 113.40, slightly helped by the weak US NY manufacturing survey. European equities lost too little ground to speak about risk aversion and safe haven flows into the yen.
EUR/GBP tests 0.85 level
EUR/GBP trading was sentiment-driven. Sterling tried to regain part of Friday’s losses in Asian and early European trading, but the EUR/GBP decline stalled at 0.8458. After bottoming out, the pair followed EUR/USD higher and reached the 0.85 handle, testing first resistance (0.8509/31) which if broken would form a triple bottom on the charts. Cable went slightly higher to 1.2940 from just below 1.29 at the open, but lost again some ground and is now quoted around 1.2918. EUR/USD outperformed EUR/GBP.
