Markets
The German Bund today oscillated near opening levels throughout the day with just one intraday market move worth mentioning. Reports suggested that ECB policy makers are in no rush to provide additional monetary support as soon as July. The downleg in the Bund disappeared as fast as it emerged however. German yields are virtually unchanged vs. opening levels with longer maturities hovering near the all-time lows. Peripheral spreads again narrow significantly as the ongoing search for yield is pushing investors towards riskier assets. Italy and Greece (both -10 bps) outperform. Italian BTP’s might have also found support in the government’s pledge to reduce the budget deficit to 2.04% and avoid EU penalties by doing so. US Treasuries retraced the majority of yesterday’s gains as investors’ eyes gradually turn to tomorrow’s (ADP, non-manufacturing ISM) and Friday’s (payrolls) key data. Will they nudge the Fed to a July rate cut? The US yield curve shifts south with yield changes varying from -1.2 bps (2-yr) to -1.6 bps (10-yr).
Global (FX) markets found a short-term equilibrium today as Saturday’s meeting between presidents Trump and Xi (and the G20 meeting) was more or less discounted and as there were few eco data in EMU and in the US. Yesterday, EUR/USD dropped below the 1.13 big figure both on USD strength (higher yields) and euro softness (poor data & political uncertainty, including on the nomination of the next ECB president). Overnight, EUR/USD touched a ST correction low in the 1.1275 area as the US extended a list of goods that might be hit with retaliatory tariffs. However, there were no follow-through losses. EUR/USD bottomed. The pair even rebounded (temporarily?) north of 1.13 on rumours that the ECB was in no hurry to ease policy already at the July meeting. Trading in the US this afternoon remains order-driven with no obvious guidance from bonds or equity markets. Investors await key US eco data tomorrow (ADP, ISM) and on Friday (US payrolls). US yields holding near recent lows indicate that markets expect to case for substantial Fed easing to remain in place, capping further USD gains. USD/JPY is trading in the 108.15 area. EUR/USD hovers near 1.13.
Sterling trading was also technical in nature, with EUR/GBP holding a rather tight range, roughly between 0.8920/70. The news flow, if any, probably didn’t help investors to turn more positive on the UK currency. The UK construction PMI unexpectedly tumbled from 48.6 to 43.1, the lowest level since 2009. UK PM candidate Jeremy Hunt said that a Brexit deal is impossible with current backstop procedure on the Irish boarder. This ‘commitment‘ only illustrates that any new talks with the EU later this year will be very difficult. Sterling declined temporarily after the construction PMI, but returned to the mid 0.89 area. Cable is changing hands in the 1.2630 area.
News Headlines
France, the UK and Germany won’t resort to the dispute mechanism incorporated in the 2015 nuclear deal with Iran after the latter said it exceeded the permitted stock limit of low-enriched uranium. A European diplomat said they first want to defuse the crisis.
Current head of the IMF Christine Lagarde is the latest candidate that is suggested to be the next president of the ECB as European leaders are trying to find a way to break the succession stalemate. Germany’s defense minister von der Leyen is currently the frontrunner to become the EC’s leader after CEE countries and the EPP rebuffed Dutch socialist Timmermans.
