Markets
Global core bonds lose ground today with US Treasuries underperforming German Bunds. Sentiment was mixed overnight as China cut its growth projections for 2019 but at the same time announced fresh tax cuts to offer some rebuttal to the growth slowdown. After yesterday’s rebound in core bonds, both US Treasuries and German Bunds started a new downleg at the EU opening bell. Eurozone PMI’s mostly surprised on the upside and weighed a bit more on Bunds. The move came to a halt around noon and reversed cautiously. The German yield curve is moving higher with changes up to +1.0 bp (10-yr). US Treasuries moved gradually lower through the day, but slowed its paced as US investors joined the debates and ahead of the ISM Non-Manufacturing Index. A positive outcome could weigh some more on US Treasuries. At the time of writing, the US yield curve is edging up with changes varying between +1.2 bps (2-yr) to +2.0 bps (5-yr). Greece successfully launched a new 10-yr bond, attracting orders over 11.3bn euros and eventually taking 2.5bn euros in at 3.90%. Italian BTP’s moved higher on an upward review of the final PMI’s and Q4 GDP result. Peripheral spreads are tightening with Italy (-5 bps outperforming).
EUR/USD trading was confined to a tight range today, roughly between 1.1315/1.1340. This euro inertia was a bit striking/remarkable. Last week, EUR/USD rebounded on market hope that EMU data might bottom, even as there was little real hard evidence. Today, the EMU services PMI (52.8) was substantially upwardly revised and so was the composite PMI. This positive development was visible in several countries, including Italy and France. Still it wasn’t able to trigger an upward reversal for the EUR/USD cross rate. US and European yields rebounded slightly after yesterday’s decline, but it wasn’t able to provide any clear guidance for global FX trading. EUR/USD is currently trading in the 1.1330 area. USD/JPY is going nowhere in the high 111 area. FX traders are counting down to the US non-manufacturing ISM.
EUR/GBP initially hovered in the 0.86 area as investors awaited news on Brexit talks that were scheduled to resume in Brussels. The UK services PMI improved unexpectedly from 50.1 to 51.3. Any gains of sterling were negligible and very short-lived. Later in the session, sterling even came under modest pressure. There was not that much of hard news on Brexit, but headlines that today’s high level meetings of UK Brexit Secretary Barclay and Attorney General Cox probably won’t lead to a final breakthrough caused some further caution on the UK currency. EUR/GBP extended its rebound off the 0.86 area and is currently trading near 0.8630. Cable dropped to the low 1.31 area.
News Headlines
Voting Boston Fed President Rosengren expects a relatively healthy US economic growth, somewhat above 2% over the course of the year with inflation very close to the 2% target and a US labour market that continues to tighten. Downside risks to the outlook justify a pause in the recent tightening cycle though.
The ECB and Bank of England decided to activate a currency swap line through which the BoE can obtain euros from the ECB in exchange for pounds. The facility activation allows both central banks to offer euro/pound liquidity to UK/euro area banks should the need arise. The move comes at the BoE’s initiative to safeguard financial stability with Brexit showing little signs of a breakthrough anytime soon.
Today’s euro area PMI’s broadly surprised on the upside. French, German and EMU-wide final business confidence were revised upwardly with the former escaping contraction territory (50.4). Preliminary Italian, Spanish and Swedish (services) PMI confidence showed signs of stabilizing/recovering after a period of declines. US non-manufacturing jumped higher to 59.7 (vs. 57.4 expected) as new orders and business activity rebounded from last month’s slip.
