Markets
Global core bonds lose ground today as risk sentiment improved drastically overnight. US President Trump officially extended the March 1 deadline for China, (temporarily) avoiding tariff increases on Chinese import. Asian bourses rallied with Chinese indices gaining up to 6%(!),but the impact on European markets remained rather limited. The uptick in sentiment did weigh on core bonds, with German Bunds edging lower. The German yield curve moves higher with changes in the range of +0.7 bps (2-yr) to +2.0 bps (30-yr). With an empty eco calendar, risk sentiment was today’s only driver. US equity markets opened also higher, weighing on US Treasuries. The US yield curve moves north with changes up to 2.3 bps (10-yr). Italian BTP futures opened higher this morning as Italy escaped a credit rating downgrade from Fitch on Friday (after markets). The BTP reversed some of it opening gains as political uncertainty grew after Deputy PM Di Maio’s 5SM lost hard in regional elections in Sardinia. Peripheral spreads over the German 10-yr yield are tightening with Italy (-9 bps) outperforming.
EUR/USD traded with a cautious positive bias this morning on positive headlines regarding the US-China trade talks. However, European markets were reluctant to join the optimism on Chinese markets. EUR/USD came with reach of last week’s ST top in the 1.1365/70 area, but a real test/break didn’t occur. Interest rates differentials also moved slightly in favour of the US dollar, tempering the case for any meaningful USD losses. EUR/USD is currently trading in the 1.1360 area, marginally stronger than Friday’s level. USD/JPY is holding in the upper half of the 110 big figure as the pair profits, albeit very modestly, from the risk-on sentiment and higher core/US bond yields. In a broader perspective, the dollar is still captured in an indecisive sideways trading pattern as conflicting signals both on trade issues and on global economic developments continue to prevent a clear direction move.
‘To delay Brexit or not to delay Brexit’, that appears to be the key question for UK politicians and for sterling traders at the start of yet another ‘key’ week in the Brexit saga. Of late, sterling performed rather strongly as investors assumed that both the EU and the UK would do everything to avoid a no-deal Brexit at the end of March. A delay was and still is one of the options to avoid such a no-deal scenario. However, today sterling didn’t make any further progress anymore. Visibility on the outcome of this week’s appearance of UK PM May before Parliament (tomorrow and on Wednesday) is close to non-existent. A scenario of high profile UK political chaos (including UK ministers and conservative MP’s leaving the government and/or the conservative party) is also still possible. In directionless trading, EUR/GBP hovered in the upper part of the 0.86 big figure. Cable is trading little changed in the 1.3075 area.
News Headlines
The Polish yield curve bear steepened after Polish ruling party leader vowed a fiscal stimulus boost to keep Polish GDP growth north of 4% this year. Yields add up to 12 bps at the 10-yr tenor. The Polish zloty strangely enough fails to profit even if such policy probably makes it more difficult for the Polish central bank to extend its ultra-easy monetary policy. Currently, the NBP envisages unchanged policy rates at least until the end of 2020.
A Spanish election poll showed on Sunday that Socialist PM Sanchez’ party would become the largest group in 350-seat Congress, obtaining 114 seats. An alliance with anti-establishment Podemos wouldn’t result in a ruling majority as the party polls at only 37 seats, coming from 70 currently. A center right coalition between the Party Popular (73) and Ciudadonos (58) also fails to hit reach the 50% mark with extreme right Vox hijacking 45 seats.
Oil slipped 2% to $65/b after US president Trump said on Twitter prices were getting too high. He urged OPEC to relax on production curbs because the “world cannot take a price hike”. Since the start of 2019, oil recovered from a 17 month low at $50/b to about $67/b as production cuts kicked in and growth worries eased somewhat.
