- European equities traded stable near opening levels in an uneventful session. US and UK markets were closed for Memorial Day and Spring Banking Holiday respectively. Italy underperformed as odds on a fall election increased and banking shares remained under pressure.
- "We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary for the present level of underutilized resources to be re-absorbed and for inflation to return to and durably stabilize around levels close to 2% within a meaningful MT horizon," ECB Draghi said.
- Growth in bank loans to EMU companies set a fresh post-crisis high in April (2.4% Y/Y), even as a key money supply indicator(4.9% Y/Y), which often predicts future economic activity, dipped more than expected, ECB data showed. Lending to households meanwhile also grew by 2.4% Y/Y in April, the same level as a month earlier, when it hit its highest level since early 2009.
- Wage growth in the EMU will come, albeit with a lag, and generate more underlying inflation if the bloc’s economic upswing continues, ECB Nowotny said. The ECB has repeatedly stressed that weak wage growth is keeping a lid on inflation and it should not remove stimulus until there is a convincing and durable upswing in underlying prices.
- Voting in fall around the same time as Germany would reduce market uncertainty about Italy, not increase it, former PM Renzi told Il Messaggero in an interview. Such rapid vote would be earlier than most market participants currently expect (early 2018).
- French President Macron’s party is expected to emerge with the most seats in June’s parliamentary election, a poll showed, with Macron also scoring well in terms of general popularity. His party would come top with 29% of the votes in the June election. The far-right National Front (FN) was seen in 2nd place with 17% of votes, with the conservatives Republicans party in 3rd with 15%. Far-left politician Melenchon’s party was seen in 4th place with 14%.
Rates
Slightly dovish Draghi in uneventful, thin, trading
US (Memorial Day) and UK (Spring Bank Holiday) markets were closed today. Their absence resulted in a lacklustre, low-volume European trading session. The Bund hovered sideways in a narrow, 18-ticks, range ahead of Draghi’s speech in European Parliament. EMU M3 money growth disappointed, but the ECB’s lending survey showed both lending to companies and households at a post-crisis high. ECB president Draghi sounded fairly dovish, saying that the central bank remains convinced that the euro area still needs an extraordinary amount of support even if downside risks to growth are firmly diminishing. The Bund gained some ground after his comments. Technically, first resistance at 162.15/49 is near.
At the time of writing, changes on the German yield curve vary between -2.9 bps (5-yr) and -1.1 bp (30-yr). On EMU bond markets 10-yr yield spreads versus Germany widen up to 3 bps with Italy underperforming (+9 bps). Supply (tomorrow) and increasing odds of a fall election weigh on BTP’s. Italy’s anti-euro party voted this weekend in favour of changing the electoral system into a proportional election system with a 5% national threshold to get in parliament. That means that Italy’s four most popular parties now signalled willingness to back this voting system which could finally put things in motion. Additionally, former PM Renzi argued in favour of holding Italian elections around the time of the German federal election (September 24). Renzi’s centre-left PD and the five star movement are currently neck-and-neck in the polls at 30%. Italian parliamentary elections are officially scheduled for May 2018, but markets anticipate a vote early 2018. Recent developments suggest that it could even be sooner.
Currencies
Draghi fails to give directional guidance for the euro
Trading in EUR/USD and USD/JPY was confined to tight ranges today with US and UK markets closed. ECB Draghi maintained a balanced approach in his appearance before the EU parliament and gave no hint on a U-turn in the ECB’s assessment at next week’s policy meeting. EUR/USD stabilizes in the 1.1175/80 area. USD/JPY is going nowhere in the 11.25/35 area.
Overnight, SF Fed Williams defended the case for three rate increases this year (including March), as he sees "the US economy is as close to the Fed’s dual mandate goals as we’ ve ever been". He also advocated a very gradual reduction of the balance sheet. The comments were marginally supportive for the dollar, but there was no clear trend.
With US and UK markets closed, trading in EUR/USD and USD/JPY was order driven and developed in thin market conditions. EUR/USD came close to Friday’s low (1.1160 area) this morning, but there was no strong enough driver to force a break below. In technical trade, EUR/USD even reversed part of Friday’s correction and settled in the high 1.11 area. Headlines on political event risk in Italy (elections in autumn?) weighed on Italian equities and bonds, but didn’t hurt the euro. USD/JPY held a very tight range in the lower half of 111.
ECB president Draghi maintained a balanced tone in his testimony before parliament this afternoon. He acknowledged that the euro area upswing is becoming increasingly solid and that some of the tail risks have receded measurably. At the same time, he repeated that the euro area still needs very accommodative conditions. Draghi didn’t give concrete hints on a significant change in the ECB’s assessment next week. The euro loses a few ticks upon the first Draghi headlines. EUR/USD trades in the 1.1175/80 area. From tomorrow, the focus might return to the US eco data.
Sterling rebounds slightly. Opinion polls stay in focus
UK markets were closed for the May bank holiday. The key question on the political scene is whether PM May’s conservative party can stop the erosion of its lead in the opinions polls as the June 08 Parliamentary elections are coming closer. Today, the uncertainty had no additional negative impact on sterling even as polls during the weekend confirmed the narrowing gap with Labour. However, investors will keep a close eye on the polls. EUR/GBP trades currently just north of 0.87, slightly off Friday’s top at 0.8750. Sterling also recouped part of Friday’s setback against the dollar The pair trades in the 1.2845 area (compared to Friday’s around 1.2775/80). For now, the overall picture on sterling remains fragile.
