- European equities opened little changed as uncertainty after the Manchester terrorist attack weighed on sentiment. However, European markets soon returned to risk-on modus as EMU eco data were very strong. Gains eased slightly in afternoon trading but most European indices still show gains of about 0.5%.
- US equities futures traded in positive territory for most of the day, but open only with marginal gains of 0.1%/0.2% as a big part of the post-Trump losses are reversed and as key technical levels are again coming within reach.
- European PMI confidence indicators indicated that European growth will stay strong in the second quarter. The May EMU composite PMI remained at the highest level in more than six years (56.8). According to IHS Markit the PMI pointed to 0.7% Q/Q in the quarter of 2017.
- German business morale as measures by Ifo brightened more than expected in May to hit its highest level on record since 1991. Both current conditions index (123.2 from 121.4) and the expectations component (106.5 from 105.2) improved further, indicating that Europe’s biggest economy is firing on all cylinders.
- President Donald Trump is set to propose a raft of politically sensitive cuts in his first full budget, for the fiscal year that starts in October, a proposal that some analysts expected would be put aside by lawmakers. Trump wants lawmakers to cut $3.6 trillion in government spending over 10 years according to a preview given to reporters.
- The Brexit squeeze on British consumers has hurt the government’s finances as well as retailers, data showed on Tuesday. A stalling of sales tax revenues, a barometer of the economy, helped to widen Britain’s budget deficit by more than expected. A separate survey showed business confidence among retailers declined at the fastest pace since 2012.
- The Hungarian central bank left its benchmark rate unchanged at 0.90% for the 12th month. Recent strong economic data failed to convince policy makers to change tactics. Rate-setters remain ready to use targeted instruments to ease conditions further if inflation remains persistently below target.
Core bonds little changed; Schatz auction fails.
Core bonds trade flat (Germany) to slightly higher (US Treasuries) in an uneventful session. Strong EMU data weighted in the morning session on the Bund and helped equities higher. From noon onwards, the Bund struggled higher, but without much conviction, but limiting the losses. The Schatz auction went poorly (see below) while the Belgium new 20-year syndicated OLO attracted strong demand and was priced sharply (see below). There was a lot of talk about the US budget proposals, but ultimately it was considered as a non-starter and thus left US Treasuries untouched. At the time of writing, US yields decline modestly between 0.8 bp (2-yr) to 1.8 bps (5-yr). The German 2-yield rises by 2.7 bp while yields at the remainder of the German curve are almost flat.
In EMU bond markets 10-yr yield spreads narrowed slightly for semi-core and Ireland (-2 bp), while Italy outperformed (-4 bps). Greece trades 15 bps wider as a result of the inability of the Greek creditors to cling a deal on debt relief. That means there is still no certainty Greece will receive the next tranche of its bailout loan. That is needed to repay €7B of maturing bonds and coupons.
Belgium sold successfully €3B of its 20 yr benchmark (June 2037) at mid-swaps +8. The debt agency allocated less than investors expected after the book totalled more the €15B. As a consequence, Belgium outperformed at the 20-yr sector. The German Schatz auction (€5B 0% June 2019)) was again very poor. The bid/cover amounted to only 0.9 (€3.965B). The Bundesbank retained more than €1B for its market regulation which brought the official bid/cover at 1.2. There was an unusual tail of 2 cents. The Schatz 2-yr underperformed the German curve.
EUR/USD extends gains, but rally to slow?
Today, the trends of the previous days persisted. USD/JPY (111.10) struggled to make any further gains even as sentiment on risk remained constructive for most of the session. The euro remained well bid supported by very strong EMU confidence data. The EUR/USD touched a new intraday top but trades currently again in the 1.1235 area. The jury is still out, but the pace of the Euro rally shows tentative signs of slowing.
Overnight, the terrorist attack in Manchester dominated the press headlines, but the impact on global markets was modest. The yen traded marginally stronger (USD/JPY 111.00). EUR/USD (1.1250 area) held near the recent highs even as negotiations on a solution for the Greek debt involving the IMF again didn’t reach a conclusion.
European equities opened mixed to slightly lower. EUR/USD dropped temporary to the 1.1225 area before the start of European equity trading. However, a series of impressive EMU eco data reactivated a European risk trade. The EMU PMI remained at the highest level in more than six years. German IFO confidence even printed the best level since the early 90’s. That data suggest ongoing strong growth in the second quarter and question the need for an extremely accommodative ECB policy stance. Core bond yields rose gradually further. Especially short-term interest rate differentials narrowed in favour of the euro. EUR/USD touched a new correction top in the 1.1268 area. As was the case of late, USD/JPY again hardly profited from the risk-on sentiment. The pair held a tight range mostly in the low 111-area.
There were no important early morning data in the US. US investors debated the new budget plan of the Trump administration. However, the plan contained aggressive spending cuts and it is unclear how the budget gap will be solved. All this makes it very unlikely a similar plan will pass in Congress. If anything, the plan might be a negative for the dollar. The US PMI report was mixed with manufacturing (52.5) printing slightly softer than expected, but services was stronger than expected (54.00). Even so, the report doesn’t help risky assets or the dollar. EUR/USD trades in the 1.1235/40 area. USD/JPY still struggles not the fall below the 111 big figure.
EUR/GBP sets a new ST correction top
Today, the news flow on the UK and the UK economy remained sterling negative. The terrorist attack in Manchester yesterday evening weighed on sterling overnight, but the losses were limited. During the morning session, the April budget deficit was reported wider than expected. VAT revenues disappointed indicating a loss of dynamics in consumer spending. The CBI May reported sales were also softer than expected. At the same time, the euro remained in good shape as EMU eco data indicating ongoing strong growth in Q2. EUR/GBP touched a new correction top in the 0.8675 area around noon. Afterwards, the euro rally shifted into lower gear. EUR/GBP trades currently in the 0.8650 area. The intraday picture of cable was more diffuse. The pair hovered sideways in the upper half of the 1.29 big figure. The pair still fails to sustain north of 1.30 even as USD sentiment remains fragile.
