- Today, markets appeared to have shrug off some of the risk surrounding a series of key events still to come this week. Traditional haven assets steadied after yesterday’s jump, with gold and Treasuries edging lower and the yen little changed. European and US equities eke out gains with Europe outperforming.
- Banco Santander has decided to take over rivan Banco Popular for 1 euro in a deal brokered by regulators. Santander is planning to raise €7bn in fresh capital to bolster Banco’s balance sheet. This marks the first test case of the Eurozone’s post-crisis bank rescue bailout regime.
- German factory orders fell by 2.1% M/M % in April (+3.5% Y/Y) after two consecutive months of expansion (March orders were upwardly revised to 1.1% M/M). It is too soon to worry however as German business confidence is still at the highest level since 1991 and the Bundesbank still predicts robust growth.
- ECB officials close to the matter unofficially declared that the ECB will cut the inflation outlook across the forecast horizon of three years to 1.5% (1.6% or above before) on account of the lower energy prices. Core inflation forecasts are likely to remain unchanged. After this announcement, the euro dropped to the low 1.12 EUR/USD area.
- The OECD lifted its global economic growth forecasts, but warned policymakers to look beyond the broader-based cyclical upturn and to continue efforts to improve growth fundamentals. The OECD also argued that economies and individuals would benefit from a global trade recovery as long as countries help those hit by greater competition.
- EON, RWE and EnBW could recover billions of euros in nuclear-fuel taxes after Germany’s top court striked down the nuclear fuel tax law. In total, EON, RWE and EnBW have paid just short of €6bn euros on nuclear taxes.
- China’s foreign exchange reserves have increased by $24bn to a 2017-high in May. China has been steadily re-accumulating foreign currency holdings following a sharp decrease in the war chest after the central bank stepped in to halt a depreciation of the renminbi in 2015. The total amount of foreign reserves is still low however.
Rates
Counting down to big events
Global core bonds traded uneventful today with German Bunds slightly outperforming US Treasuries following rumours that the ECB will cut its inflation forecasts at tomorrow’s policy meeting. The eco calendar was empty on both sides of the Atlantic, but the OECD updated its global economic outlook. Especially the downward revision to US GDP growth in 2017 (2.1% from 2.3% in November) and 2018 (2.4% from 3%) caught the eye. Higher European equity indices and lower oil prices sent mixed signals for core bond trading and were also ignored.
At the time of writing, changes on the German yield curve range between -0.6 bps (30-yr) and +0.6 bps (5-yr). The US yield curve shifts 1.5 bps higher. From a technical point of view, key support levels in the US 5-yr (1.69%), 10-yr (2.16%) and 30-yr (2.82%) yield remain under attack, but a sustained break lower didn’t occur in the run-up to tomorrow’s key events (ECB meeting, UK elections, Comey hearing). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -2 bps and +1 bp.
The German Finanzagentur held a €3B Bobl auction (0% Apr2022). Total bids amounted to €3.76B, in line with the €3.75B at the previous 4 Bobl taps. The Bundesbank retained €0.59B for secondary market operations, resulting in an official bid cover of 1.6 (real bid cover 1.3). The auction had no tail. The Italian debt agency launched a new syndicated 30-yr benchmark (Mar2048). The bond was priced to yield 10 bps above the 2.7% Mar2047 BTP, compared to +12 bps initial guidance. The bond drew strong demand with the order book exceeded €22B, allowing the debt agency to print €6.5B.
Currencies
Dollar decline slows ahead of tomorrow’s key events
The dollar, and even more the euro, showed two faces today. The dollar traded in the defensive this morning as investors pondered the potential impact of tomorrow’s event risk. Risk sentiment improved throughout the session and blocked further USD losses. Later in the session, rumours on a softer ECB inflation forecast triggered a modest setback of the euro. EUR/USD trades currently around 1.1230. USD/JPY is changing hands in the 109.50 area.
Overnight, Asian indices traded slightly positive with China outperforming as the recent CNY rally slowed. Investors continued looking forward to tomorrow’s key events including the testimony of former FBI director Comey. USD/JPY (109.5 area) traded slightly off yesterday’s correction low (109.23). However the dollar remained in the defensive against most majors including the euro. (EUR/USD 1.1265).
Early in European dealings, dollar weakness persisted. However, the modest risk-off trade gradually eased and the dollar found an intraday bottom. USD/JPY filled bids in the 109.12 area. EUR/USD jumped up and down in the 1.1250/75 area. However, the 1.1284/1.1300 resistance area stayed intact. Around noon, markets were again spooked by rumours from ‘well-informed sources’ that the ECB will probably cut its inflation forecasts at tomorrow’s policy assessment. Interest rate differentials between the dollar and the euro widened slightly. EUR/USD declined to the low 1.12 area. European equities also rebounded slightly, helping USD/JPY return to the mid-109.50.
There was still no high profile market theme to guide FX trading in the US. EUR/USD (1.1230) and USD/JPY (109.55) are locked in tight ranges. Equities try to regain some momentum, but any gains and the impact on other markets remains very limited? Waiting for ….
Sterling little changed going into the election
Sterling was in consolidation modus today. Trading in the major sterling cross rates was confined to relatively tight ranges given the magnitude of tomorrow’s event risk. Investors have adapted positions in the run-up to the UK election. Cable held a tight range around, but mostly slightly north of 1.29. This suggests a tentative sterling positive momentum. However in the current environment, we don’t make too much out of it. Tomorrow, the world for sterling trading can be completely different. The same applies to EUR/GBP. The pair dropped below the 0.87 mark. This was in the first place a euro correction on the ECB’s inflation rumours, but in a second degree also because of a better bid for sterling. Tomorrow evening/Friday morning we know whether this tentative bid is justified.
