- European equities traded sideways and are currently marginally down, while US equities open marginally higher and are a whisker away from all -time highs.
- U.S. home sales fell more than expected in April, weighed down by a shortage of houses on the market. Existing home sales declined 2.3 percent to a seasonally adjusted annual rate of 5.57 million units. Despite the decline, April’s sales pace was the fourth highest over the past 12 months.
- Sweden’s central bank is once again ramping up the pressure on the government to do more to address the country’s rapidly-rising debt levels, warning that the issue poses "a serious threat to financial and macroeconomic stability
- The reliance of the eurozone’s financial system on the policies of its central bank have been laid bare in the European Central Bank’s latest financial stability review, which highlights the risks posed by attempts to rein in extraordinary monetary stimulus.
- The Bank of Canada as expected kept its policy rate unchanged at 0.5%. The Bank still sees current monetary stimulus as appropriate. The bank sees recent economic data as encouraging, but the uncertainties flagged in April are still clouding the outlook.
Listless bond trading awaiting FOMC minutes.
In a news-poor session, core bonds traded quietly. US yields are very little changed while German yields are modestly lower. US Treasuries hovered listless in a very tight 4/32 range, awaiting the FOMC Minutes. The Bund opened a little lower, but soon went higher. However, gains were limited and in the afternoon the Bund faded, losing most of the small morning gains. Comments of ECB Praet and Draghi were interesting (see below), but unable to impact markets. At the time of writing, US yields barely moved and yield changes vary from +0.6 bp (2-yr) to -1.4 bp (30-yr). German yields fell between 1.2 and 2.3 bps, flattening the curve.
In EMU bond markets 10-yr yield spreads narrowed about 3 bps across the board with Portugal (+6 bps) and Greece (+20 bps) underperforming. In case of Portugal, it might be due to news that it wants to pay back IMF loans. Markets expect more supply. Greece is still reeling from the absence of an agreement between its creditors.
ECB Praet sounded optimistic on growth as he sees an increasingly solid recovery which is remarkable resilient to external shocks. He wants to see the good surveys translated in hard data. Q1 was already strong, but we think that Praet wants a confirmation from Q2 GDP. He sees the output gap closing in 2019 when price pressures will increase and the ECB objective will be fulfilled. He added that underlying inflation is still low. "It’s a debate for the coming weeks, coming months to say to what extent we have confidence in" the projected path of inflation and "to what extent –if you start withdrawing accommodation — this inflation path is sustained" So, now even the very dovish and influential ECB member is ready to question short term the path the ECB will follow in his policy.
Draghi said "Asset purchases are inevitably more difficult to calibrate, more complex to implement, and more likely to produce side-effects than other instruments, including moderately negative rates" He clearly restates the sequence of the exit policy: First ending QE, later reversing negative rates.
Dollar stays off recent lows, but no further gains
Today, the dollar maintained most of yesterday’s late session gains, but there was no news to inspire additional follow-through gains. EUR/USD stabilizes in the high 1.11 area. USD/JPY is changing hands around 111.80. The FOMC minutes to be published later on will probably decide the fate.
Overnight, Asian equities showed a mixed picture. USD/JPY traded in the high 111 area going into the European open. The China rating downgrade put temporary pressure on the Aussie dollar. AUD/USD dropped to the 0.7450 area, but the Asian losses were reversed later in the session. EUR/USD held a tight range in the 1.1180 area after yesterday’s setback.
There was hardly any news to guide trading in the major FX cross rates in Europe. European equities held a sideways trading pattern near yesterday’s closing levels. The dollar maintained yesterday’s gains against the euro and the yen. USD/JPY tried a shy attempt to regain the 112 mark, but failed. ECB Praet’s Praet suggested that the ECB might reconsider some elements of its ultra-easy in the near future. However, the euro hardly reacted.
There were also no US data releases. US equities opened marginally higher, near the highs, but the moves in equities, yields and FX remain very limited. EUR/USD trades in the 1.12 area. USD/JPY is seen in the d 111.75/85 area. The FOMC minutes later this evening might decide if there is room for a USD rebound.
EUR/GBP rebound takes a breather
Today, there were no eco data or other events with market moving potential in the UK. Technical considerations and the price moves in the euro and the dollar drove sterling trading. The terror warning had hardly any impact on the UK currency. Early this morning, yesterday’s EUR/GBP correction went a bit further, but new buying interest already kicked in just north of the 0.86 big figure. An intraday bottoming out in the EUR/USD also prevented further EUR/GBP losses. The pair is again trading in the 0.8640/50 area. So, the EUR/GBP uptrend isn’t broken yet. Cable again tried to regain the 1.30 barrier after yesterday’s setback, but the attempt failed again as the dollar was in (slightly) better shape compared to of late. Cable trades again in the 1.2950 area.
