- European equities had a uneventful session, mostly spend in negative territory, but now approaching opening levels.US equities take a strong start, suggesting that a stronger euro is starting to take its toll on EMU equities.
- The euro rose as much as 0.4% to $1.1250 -its highest level since November 9 -having declined as much as 0.4% to $1.1262 earlier in the day. The moves came after Angela Merkel, the German chancellor, told school students in Berlin that "the euro is too weak", which she attributed to European Central Bank policy.
- EU ministers have unanimously agreed to hand the European Commission a tough negotiating mandate for the Brexit talks, pencilling in the start of withdrawal discussions with the UK around June 19.
- Theresa May has dramatically rewritten her controversial "dementia tax" plans, announcing that she will put a cap on total care costs to protect homeowners from the risk of losing nearly all of their assets. The original Tory policy stipulated that people would have to pay all of their care costs – whether at home or in a care home – apart from their last £100,000 of assets.
- Germany and France are considering boosting cooperation between their top companies under an initiative launched last week by chancellor Angela Merkel and president Emmanuel Macron to strengthen bilateral relations and revive the euro area economy.
Modest downward pressure on bonds continues
In a thinly traded, data-poor session, German bonds came under modest selling pressure mid-morning, that accelerated around noon. There was a quote of Merkel that the euro was too cheap and lots of talk of Weidmann replacing Draghi as ECB chief…. in October 2019 when Draghi’s term ends. US Treasuries fell slightly in the overnight session to stabilize further out. European equities traded mixed with Italy underperforming, while oil was slightly up around $54/barrel. We shouldn’t draw conclusions from today’s price action that may have been nothing more than noise. At the time of writing, US yields rise an insignificant 0.8 bps (2-yr) to 1.2 bps (5-10-30-yr). The German yields rise by 0.8 to 3.5 bps, steepening the curve a tad.
The Spanish socialist party elected Mr. Sanchez, a left oriented politician, as their leader. He promised a tough opposition to PM Rajoy’s minority government, which might cause problems for Mr. Rajoy further down the road and new elections are not excluded. The socialists abstained to make Rajoy’s minority government possible. Spanish equities didn’t underperform (contrary to the Italian ones), but the 10-yr yield spread with Germany widened 1 bps while Italy and Portugal saw their spread drop 3 to 4 bps. Greece outperformed (-8 bps) as the Euro group discusses the Greek situation.
Merkel comments push euro beyond EUR/USD 1.12.
Today, the euro dropped temporary early in Europe, but the dip was short-lived. Later in the session, the euro set new highs after comments from German Chancellor Merkel that the euro is too weak. EUR/USD trades currently in the mid 1.12 area. At the same time, the dollar struggles not to lose ground against other majors. USD/JPY trades in the 111.25/30 area.
Overnight, Asian equities joined Friday’s US rebound. A further rise in the oil price supported commodity related assets. The focus turned to the visit of the President Trump to the Middle East, easing market uncertainty. Still the risk-on sentiment didn’t help the dollar. EUR/USD held just below 1.12, within reach of Friday’s top. USD/JPY gains remained modest and rebounded to about 111.50.
European equities took a uninspiring start and soon reversed opening gains. This hesitant start caused a tempering decline in EUR/JPY, EUR/USD and USD/JPY. Rising political uncertainty in Spain (new socialist leader) maybe provided an excuse for some euro profit taking, but the euro dip was short-lived. Just before noon, the euro (and European yields) jumped higher on comments from German Chancellor Markel. Elaborating on the German trade surplus, she said that the euro was too weak due to ECB monetary policy, making German products cheap. It is a bit ‘strange’ to see the euro and the German/EMU yields rising in lockstep due to these comments as a strong euro might make it more difficult for the ECB to raise rates. Even so, interest rate differentials between the dollar and the euro narrowed. EUR/USD set a new recovery top just below 1.1250. The euro was maybe also supported by press comments that German Chancellor Merkel will push for Weidnann as ECB president.
The combination of USD weakness and euro strength continued as US traders joined the fray. US equities opened narrowly mixed. EUR/USD (currently 1.1245) is holding within reach of the correction top. USD/JPY also struggles not to drift south. The pair is changing hands in the 111.30 area.
EUR/GBP testing 0.8650 barrier on euro strength
Euro strength is also the dominant factor for EUR/GBP trading. The Merkel comments on a weak euro pushed EUR/GBP further beyond the 0.86 big figure. The pair trades currently near 0.8650. At the same time, sterling also tried to regain ground against an overall weak dollar. The pair returned to the 1.30 area, but Friday’s top (1.3040 area) stayed out of reach. Some factors weighed on the UK currency. The lead of the conservative party over labour in the polls for the Parliamentary election is still big, but declining. This causes some unease for sterling. Today, the EU rubberstamped its Brexit negotiation position. The EU still wants an agreement on the UK financial commitments first. The EU starting point suggests a difficult start for the Brexit negotiations. At least for now, this uncertainty weighs more on the sterling than on the euro.
