Markets
Core bonds managed to cling to Friday’s impressive gains. More hawkish trade rhetoric over the weekend caused a deep negative opening on European stock markets with core bonds, but mainly US Treasuries, profiting. The move didn’t last long though with equities rapidly finding a bottom and topping core bond gains. Several US Fed governors are still scheduled to speak, but tomorrow’s address by Fed Chair Powell probably overshadows them. The US yield curve continues to bull steepened with yields down 3 bps (2-yr) to 0.4 bps (30-yr). Changes on the German yield curve are limited between +0.6 bps (2-yr) and -1.6 bps (30-yr). 10-yr yield spreads vs Germany narrowed up to 3 bps with Italy (-7 bps) outperforming. Investors clearly don’t fear PM Conte’s press conference later tonight. Media suggest that he plans to issue an ultimatum to his quarreling deputy PM’s, 5SM’s Di Maio and Lega Salvini. Polls and European elections show that mainly Lega (34%) will profit from a new ballot.
The sharp decline in US interest rates (and US-GE spreads) on Friday finally triggered an (albeit modest) decline of the dollar, pushing EUR/USD higher in the 1.11 big figure. Uncertainty on different aspects of the US trade war continued to haunt markets this morning, but the decline in core yields and in equities was modest and orderly. The dollar initially showed no clear trend. USD/JPY hovered in the lower part of the 108 big figure, holding within reach of recent lows. The euro even slightly outperformed in technical trade, with EUR/USD testing the 1.12 barrier. EUR/USD shorts are less at ease as Friday’s price action suggested that, at some point, the trade war could become a negative for the US economy and the USD, too. US data starting with the manufacturing ISM later this afternoon might become a good pointer of further potential negative fallout.
Sterling continued fighting an uphill battle today. Both economic and political events weighted on the UK currency. Sterling tried a cautious rebound early in the session, but the upside was blocked soon. The UK May manufacturing PMI unexpectedly dropped from 53.1 to 49.4, indicating a contraction in the sector. The consensus only expected a more modest decline to 49.4. Sterling gradually came under pressure after the publication of the PMI. Headlines of Boris Johnson advocating that the UK should leave the EU on October 31, with or without an exit deal, brought the political event risk of a potential disorderly Brexit back in the spotlights. EUR/GBP came again close to last week’s top in the 0.8870/75 area. The overall rebound of EUR/USD also supported the EUR/GBP cross rate. The performance of sterling against the dollar was more balanced as the US currency was also under modest pressure. Cable is changing hands in the 1.2630 area.
News Headlines
Mexico sent a senior delegation to Washington on Monday after US president Trump unexpectedly announced a 5% tariff on all Mexican imports end of last week. Mexico’s ministers of Foreign Affairs, Agriculture and Economy are scheduled to meet their US counterparts this week.
The Belgian central bank said it “stands ready” to activate the countercyclical buffer for credit risks after an important credit cycle indicator surpassed key thresholds. Germany’s financial stability board suggested the introduction of a similar buffer last week to ensure lending in case of an economic downturn.
US ISM manufacturing business confidence unexpectedly slipped from 52.8 to 52.1 in May (53.0 expected). Details however were not too bad. Production edged lower but new orders and employment slightly rose compared to April. New export orders left contraction territory.
