The European equity sell-off resumed at today’s opening, but found a bottom around noon. There was a tentative attempt to fight back going into the US session, but the outcome is still uncertain. US equities open marginally negative.
Warmer weather and a late Easter encouraged UK shoppers to return to the high street in April, with retail sales rebounding strongly. Total retail sales excl. auto fuel increased by 2% M/M and 4.5% Y/Y. The results were much better than economists had forecast – analysts had expected a monthly increase of 1%.
ECB chief economist Peter Praet warned his colleagues to tread with caution when publicly discussing plans the bank has to wind down its stimulus measures, according to the minutes of the latest ECB meeting. "Any substantial change in communication needed to be motivated by some more evidence that the present indications of acceleration of activity found confirmation in hard data and fed through to an adjustment in inflation."
The UK Conservatives’ lead over the Labour party has fallen to its lowest level of the election campaign so far, according to the first major poll carried out since Labour launched its manifesto this week. The Conservatives were still comfortably ahead, however, with 49% of respondents supporting May’s party.
News of a bribery scandal engulfing Brazilian president Michel Temer last night hit the country’s assets, as investors take cover against a fresh corruption crisis which threatens to pierce the country’s tentative return to political stability. The Brazilian real suffers a 8% blow against the dollar.
US initial claims fell to 232K from 236K previously, defying expectations for a rise. It is one of the lowest observations of the past decades and suggests ongoing labour market strength. The Philly Fed business survey defied expectations for a deterioration of conditions. The headline rebounded to a very high 38.8 from 22 previously, re-approaching the 30-yr high reached in February (43.30).
Rates
Core bond rally slows, as no new info is available.
Global core bonds continue to profit from the risk aversion which continued to dominate trading today, even if the movements slowed. European equities declined mainly in the morning session. In the afternoon, Bunds traded sideways, as equities bottomed and even regained some slight ground ahead of the US open. There was evidence of various contacts between Trump’s campaign team and Russia, but no evidence yet about wrongdoing according to some officials. That wasn’t enough for bonds to keep yesterday’s strong pace of advance intact though.
At the time of writing, US yields are narrowly mixed between +1.4 bps (2-yr) and -3.1 bps (30-yr) flattening the curve. The German yield curve bull flattens with yields 0.6 bps (2-yr) to 3.6 bps (30-yr) lower. On intra-EMU bond markets, 10-yr peripheral yield spreads versus Germany widened by 2 to 4 bps, with Greece underperforming (+11bps).
Intraday, the Bund opened strong and rallied once equities resumed their sell-off after the European open. French labour market data were surprisingly strong (Q1), confirming the catching up the French economy is making since a few quarters. However, core bonds were driven not by data, but by risk sentiment. Once equities bottomed at noon, Bunds topped and started trading sideways. US Treasuries followed Bunds higher in the European morning session, but eased in early US trading, which was reinforced by the strong data. Initial claims dropped instead of the expected increase and the Philly Fed business confidence printed very strong. US Treasuries finally settled around yesterday’s closing levels.
Currencies
Dollar more resilient even if sentiment remains fragile
Global markets stayed in risk-off mode today as the Trump correction continued. However, the risk-off trade had no additional negative impact on the dollar. Interest rate differentials turned slightly in favour of USD. The US eco data were better than expected. EUR/USD traded off the overnight top and hovers in the low 1.11 area. USD/JPY rebounds to the 110.50/111.00 area even as US equities struggle to prevent further losses.
Overnight, Asian equity losses were modest given yesterday’s sharp decline in the US. USD/JPY touched a correction low near 110.55, but rebounded to the 11.20 area at the start in Europe. EUR/USD showed a similar picture. The pair touched a minor top around 1.1172, but returned to the 1.1150 area.
With few eco data on the agenda in Europe, the only relevant question for global trading was whether the risk-off trade would continue. European equities opened only marginally lower despite a poor close in the US yesterday. However, the selling of risky assets resumed and European equity indices soon showed additional losses of around 1%. Contrary to what was the case yesterday, the dollar stayed away from the overnight lows against the euro and the yen. Interest rate differentials between the dollar and the euro settled north of yesterday’s lows, giving the US currency some downside protection. EUR/USD hovered sideways in the lower half of the 1.11 big figure. USD/JPY stabilized in the mid 110 area. The dollar entered calmer waters.
The US jobless claims and the Philly Fed survey were strong. Especially the Philly Fed survey printed at a historically very high level, easing concerns on an imminent slowdown in the US. The dollar gained slightly further ground after the publication of the release. This afternoon, there were also plenty of headlines on the political crisis in Brazil. Of late, the dollar wasn’t in a very good position to play a safe haven role. However a crisis in Brazil maybe still cause some buying interest for the US currency in the American region. Whatever the reason, risk sentiment remains very fragile but the dollar was much more resilient than yesterday. EUR/USD trades currently in the 1.1110 area. USD/JPY changes hands in the 111 area.
Sterling rebounds on impressive retail sales
Sterling didn’t profit from a good labour market report yesterday. Today’s reaction to the April retail sales was different. The rebound in April sales was much bigger than expected at 2.3% M/M and 4.0% Y/Y. March sales were also less negative than initially reported. The report eased recent fears (which were also mentioned by the BoE) that a decline in real income due to higher inflation could weigh on domestic spending. The report was a good reason for markets to rectify the recent sterling underperformance. EUR/GBP dropped from the 0.86 area to fill bids around 0.8525. Cable finally cleared the 1.30 barrier and came close to the 1.3050 area. The pair trades currently in the 1.3020 area as pressure on the dollar is slightly easing. ST consolidation in EUR/USD currently prevents an intraday rebound in EUR/GBP. The pair holds in the 0.8540 area.
