Markets
Global core bonds gain ground with US Treasuries outperforming German Bunds. Risk sentiment initially remained resilient despite messages that the US considers tariffs on $11bn of EU import, acting on a WTO report that indicates the EU is unrightfully subsidizing Airbus, adversely impacting the US. Investors largely ignored the news, possibly as the US retaliatory actions are WTO-backed and suggest these actions of protectionism could be a one-off. German Bunds lost minimal ground in early trading. Rumors that German chancellor Merkel was open to support a 5-year time limit on the Irish backstop, possibly breaking the Brexit deadlock, lifted sentiment and pushed core bonds down. However, the German ministry later denied the news, re-directing core bonds to opening levels. The German yield curve is mixed with changes ranging from -2.3 bps (10-yr) to +0.4 bps (2-yr). Before the WS opening, US President Trump personally confirmed the tariffs on EU imports. He added that the EU has taken advantage of the US on trade for many years and added he’ll put an end to that. Moreover, the IMF cuts the global growth outlook to the lowest level since the financial crisis. Investors sentiment slid away, pushing core bonds higher. The US yield curve is moving lower with change up to -3.8 bps (10-yr).
The dollar traded in the defensive yesterday and this trend continued today. Yesterday we interpreted the move as mainly technical in nature. A further rise of the oil price supported commodity currencies and also weighed on the dollar overall. The oil price rally stalled today. Still, the dollar lost modestly further ground against most other majors. This was also visible in EUR/USD. The pair extended its rebound in the 1.12 big figure and trades currently in the 1.1275 area. We indeed interpret the move as mainly USD softness. That said, the euro traded quite resilient given today’s news flow. The US preparing tariff hikes on $1bn worth of European imports following the dispute on aircraft subsidies could have been a euro negative. This also applies to Italy raising its 2019 budget deficit forecast to 2.5%. Today, it hardly affected EUR/USD. Maybe the prospect of a long Brexit delay caused some unwinding of euro shorts. Interest rate differentials also narrowed slightly in favour of the euro/in disadvantage of the dollar. The dollar is also losing further ground against the yen. USD/JPY is trading in the low 111 area.
EUR/GBP trading was again some kind of erratic in nature as markets await the outcome of the next phase(s) in the Brexit saga. EUR/GBP initially hovered in the 0.8620 area. Sterling temporary gained a few ticks on rumours that German Chancellor Merkel was considering an (albeit long) time-limit to the Irish backstop. However, the rumour was denied. Most EU officials indicate that a long delay remains preferred. The UK still aims a Brexit delay till June 30, but at least for now there is no indication that a compromise might be found in the UK Parliament anytime soon. The UK currency is slightly losing ground. EUR/GBP is trading in the 0.8635 area going into tomorrow’s EU summit on Brexit. Cable hovers in the mid 1.30 area, but this sterling resilience is partially masked by USD softness.
News Headlines
Mere hours after US’ Lighthizer proposed a levy on a range of EU products in response to European subsidies given to Airbus, the European Commission is said to ask the WTO to determine the bloc’s retaliation rights, adding that the US countermeasures are “greatly exaggerated”. The move risks escalating trade tensions at a time trade negotiations about cuts in industrial tariffs have yet to start.
The IMF cut its outlook for global growth this year from 3.5% in January to 3.3% with risks skewed to the downside. That is the weakest rate since 2009. US growth in 2019 was revised downwardly to 2.3% (vs. 2.5% earlier) but was upgraded to 1.9% for 2020 on the Fed’s dovish shift. The euro area saw its 2019 outlook slashed to 1.3% (down from 1.6%) with notable changes to German and Italian growth (both -0.5% points). China is expected to grow 6.3% this year, marginally higher vs. January.
