European stock markets lose around 1% as US political drama created risk aversion. US stock markets currently drop by 0.5%to 0.75%. The main barometer tracking expectations for US equities market tumult (Vix) climbed by the most since before the November election, highlighting the rising market jitters over the Trump administration.
The UK unemployment rate dropped to its lowest in more than four decades last quarter (4.6%), but UK workers saw their real earnings fall for the first time in 2 1/2 years, data from the ONS showed. Employment growth was strong in March, rising by 122k 3M/3M vs 21k consensus.
The ECB should begin unwinding its ultra-loose monetary policy soon if it wants to avoid damaging side-effects, German Deputy FM Spahn said. He added that there was too much public and private debt in the world and called for an acceleration of structural reforms, saying monetary policy could not solve structural problems.
Theresa May has said she is "happy" to endorse Philip Hammond, but failed twice to say he would remain chancellor after the election. Mrs May, responding to questions about tensions between the chancellor and Number 10, declined to say that he would still be in post if she wins the election.
BoJ governors Kuroda told Japanse PM Abe that Japan’s economy is steadily recovering and will continue to grow above its potential. Under these conditions, prices will rise, but inflation is still far from the BoJ’s 2% target. Therefore, the BoJ will continue with its monetary easing programme, Kuroda said.
The Polish central bank kept its policy rate unchanged at a record low of 1.5% , but an economic surge last quarter, compounded by faster-than-forecast core inflation and months of gains in the zloty, is putting the spotlight on the Monetary Policy Council’s commitment to its longest-ever pause in interest rates.
Iceland’s central bank cut its 7-day term deposit rate by 0.25% to 4.75% amid krona appreciation. Sedlabanki said the outlook is for stronger GDP growth this year than previously forecast. The deviation stems mainly from stronger-than-expected growth in tourism, while there is also the prospect of more fiscal easing in 2017.
Ford said it aims to reduce its salaried workforce in North America and Asia by 10%, a cost-cutting move aimed at shoring up profits amid cooling sales in the once-booming U.S. and Chinese auto markets.
Emmanuel Macron has appointed Bruno Le Maire, a member of rival rightwing Les Republicains party as economy minister as France’s centrist president seeks to maximise his chances to win a majority in parliament in June.
Rates
US political risk triggers safe haven flows
Global core bonds profited from safe haven flows. US political risk took the upper hand amid empty eco calendars in EMU and the US. At the time of writing, the US yield curve shifts 4..1 bps (2-yr) to 6.8 bps (5-yr) lower. The German yield curve bull flattens with yields 2.1 bps (2-yr) to 5.4 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal outperforming (-4 bps) and Greece underperforming (+5 bps). Tonight, Greek parliament is expected to vote on additional reform measures necessary to unlock the next aid tranche.
Intraday, the Bund opened stronger on the back of Asian risk aversion. US media reported that President Trump asked former FBI-director Comey to back off the investigation into former National Security Adviser Flynn after the latter resigned. It’s the latest development related to the enquiry into ties between Trump’s administration/campaign team and the Russian government. Markets conclude that Democrat/Republican resistance against Trump will increase further, possibly harming his ambitious reform agenda. After a weaker European equity market opening, markets steadied and even returned some of the initial losses. As US investors entered dealings, a second risk-off move occurred. The US Note future broke above 125-26+ resistance, suggesting return action towards the contract high (126-20) even if the Fed is about to hike rates at its June meeting. US stock markets lose up to 1% in the opening.
The German Finanzagentur tapped the on the run 30-yr Bund (€1B 2.5% Aug2046). Demand was significantly stronger than the average total bids at the previous 4 very long Bund auctions (€1.91B vs €1B). The Bundesbank retained €0.19B of the amount on offer for secondary market operations, resulting in an official bid cover of 2.3. The auction yield (1.24%) was the highest since September 2015.
Currencies
USD/JPY and EUR/JPY tumble in risk-off trade
Markets pondered the impact of the new press articles accusing Donald Trump having tried to influence an FBI investigation against his former security adviser. The dollar initially held near Asian lows against the euro and the yen, but European investors awaited guidance from their US colleagues. During the US session, risk sentiment deteriorated further. This triggered a standard risk-off trade in the FX market. USD/JPY (currently 111.50) was aggressively sold and also dragged EUR/JPY sharply lower. EUR/USD was in good shape of late, but heavy selling from EUR/JPY currently caps further EUR/USD gains (low 1.11 area).
Overnight, sentiment turned risk-off on headlines that president Trump asked FBI director Comey to stop an investigation against Trump’s former national security adviser. Asian equity losses were modest, but the decline in US equity futures suggested that this case might have more impact than recent ones. USD/JPY declined to the mid 112 area. Dollar weakness propelled EUR/USD north of 1.11.
EUR/USD touched a new correction top in the 1.1122 area before the European market opening. USD/JPY filled bids in the 112.25/30 area. European equities opened with losses of 0.5%+, but the damage was limited and most indices soon recouped a substantial part of the initially losses. Interest rate differentials between the dollar and the euro narrowed a few bps compared to yesterday, but the trend didn’t push through as trading proceeded and the USD decline slowed (temporary). Investors awaited more guidance from the US.
Early in US dealings, US investors also reacted in a guarded way to the overnight up-tick of Trump uncertainty. However, tensions rose in the run-up to the cash open of the US equity markets. In the FX market, the risk-off trade weighs both on USD/JPY (111.50) bit also on EUR/JPY (124.00) area. For now, the decline of EUR/JPY prevents a further rise of EUR/USD. The pair stabilizes in the low 1.11 area. So, despite recent constructive sentiment, the euro still isn’t able to take up the role of a full-sized safe haven currency. Admittedly, the gains of the Swiss franc (EUR/CHF 1.0910) is not that convincing yet.
EUR/GBP stabilizes as focus turns to the dollar
The April UK labour market report was solid. Employment grew a stronger than expected 122 000 in the 3 months through April and the unemployment rate declined from 4.7% to 4.6%, the lowest level in almost 42 years. However, wage growth was again the missing link. Pay rises ex bonuses slowed from 2.2% Y/Y to 2.1%, making real wage growth negative with yesterday’s (April) CPI inflation of 2.7% Y/Y in mind. Sterling’s reaction was limited. Chance are low that the BoE will raise its policy rate any time soon as long as low/negative wage growth is at risk to further slow UK spending/growth. Trading in EUR/GBP was mostly driven by the gyrations of the euro and the dollar. EUR/GBP touched an intraday top of 0.8615 early this morning, but lost slightly ground as the overall euro rally ran into resistance. EUR/GBP trades in the 0.8685 area. Cable also slightly outperformed EUR/USD after the recent underperformance. GBP/USD came close to the recent highs, but trades currently again in the mid 1.29 area. A real test of the 1.30 barrier didn’t occur yet.
