- U.K. government bonds declined after BoE Haldane’s hawkish remarks, while Sterling eked out its biggest daily gain in a week against the dollar, after reaching a two-month low earlier in the day. Oil meanwhile continues to hover around $43.5.
- The European markets opened in the red, but reduced losses to around 0.30%. US equities started trading mixed with NASDAQ again outperforming.
- Bank of England chief economist Haldane declared today he considered voting for a rate hike in the past policy meeting. He stated that the risks of tightening policy too late are rising. This communication adds to earlier conflicting views from the BoE’s members with an unexpected hawkish 3-5 voting for a hike countered by governor Carney signalling he wasn’t in a hurry to raise rates.
- UK PM Theresa May promised to listen more closely to businesses’ concerns about Brexit as she set out a Brexit-focused government programme. The program underscores May’s fragility after she miscalculated in calling a snap general election that stripped her Conservative Party of its majority.
- Macron faced multiple resignations in his cabinet recently, three from the MoDems and one socialist. Macron’s party however has a big majority in the French parliament. Beyond the need for a more thorough reshuffle of his cabinet, the resignation has little impact.
Rates
UK Gilts pull Bunds and US Treasuries lower
Global core bond trading showed two faces today. Initial European equity market weakness and a dip of Brent crude to yesterday’s lows (around $45.5/barrel) provided a safe haven bid for German Bunds and US Treasuries. The minor upward bias remained in place until comments of BoE chief economist Haldane. He advocated a rate hike later this year and joins the growing hawkish wing inside the Bank of England. Last week, 3 other governors already voted in favour of immediate tightening. UK Gilts suffered a significant blow and pulled German Bunds and US Treasuries also lower in absence of eco data or other news. The UK yield bear flattened with the 2-yr yield up to 7.5 bps higher and testing the 2017 high around 0.2%. Equity market sentiment also improved in the run-up to the start of US dealings and lifted safe haven flows.
At the time of writing, changes on the German yield curve range between +2.2 bps (5-yr) and -1.4 bps (30-yr). The outperformance of the very long end of the curve was partly supply-related (see below). Changes on the US yield curve vary between +0.9 bps (30-yr) and +1.7 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal underperforming (+5 bps).
The German Finanzagentur concluded this week’s scheduled EMU bond supply with a 30-yr Bund auction (€1B 2.5% Jul2044). Total bids amounted to €1.66B, which was better than the €1.2B average at the previous 4 very long Bund auctions. The Bundesbank retained €0.19B for secondary market operations, resulting in an official bid cover of 2. The auction tailed 1 cent.
Currencies
USD trading still confined to tight ranges
As was the case earlier this week, there was still an absolute lack of news to inspired USD trading. EUR/USD was locked in well-known territory in the mid 1.11 area. USD/JPY traded more or less to the tune to of the equity swings. In the afternoon, a cautious rise in core bond yields supported an intraday comeback. Even so, USD/JPY 111.50/60 was quite a familiar level of late. The waiting for Godot process for USD traders continues.
Overnight, Asian equities lost modest ground, but less than Wall Street yesterday. Oil ($46 p/b for Brent) struggled to prevent further losses, but had no direct impact on USD trading. USD/JPY lost a few ticks on the modest risk-off sentiment and traded in the 111.30 area at onset of European trading. EUR/USD traded unchanged (1.1135).
European equities recorded substantial losses in the open. The decline of the oil price and, maybe, some political noise from France (resignation of ministers from the Macron government) triggered some further profit taking. Initially, the impact on the major dollar cross rates was again negligible. EUR/USD held a tight range in the mid 1.1130/55 area. USD/JPY lost slightly ground and filled bid in the low 111 area.
There was a bit more animo as soon as US traders joined the fray. Hawkish comments from BoE chief economist Haldane not only triggered a rise in UK yields, but the rise also spilled over to US and European yields. At the same time, equities started an intraday comeback. USD/JPY returned to the 111.50/60 area. EUR/USD still didn’t go anywhere and is paralysed in the mid 1.11 area. Interest rate differentials between the US and Germany hardly changed.
Sterling makes another U-turn on conflicting BoE talk
Comments from BoE governors continue to the haunt UK interest rate markets and sterling. Yesterday, sterling reversed recent gains as BoE governor Carney explicitly said that it is too early for a rate hike. Sterling declined against the dollar and the euro and remained in the defensive this morning. EUR/GBP even came within reach of the 0.8854/66 key resistance. However, a real test didn’t occur. Early afternoon, sterling fortunes changed, as BoE chief economist Haldane said that it could be prudent to withdraw some policy stimulation in the second half of the year. At last week’s BoE meeting, Haldane was the in the camp of the MPC members who voted to leave rates unchanged. So, the division within the BoE on how to handle current economic uncertainty is profound. If eco data remain constructive, the outcome of the next BoE meetings shall be a close call. Sterling rebounded impressively. EUR/GBP dropped to the 0.8775 area. Cable returned close to the 1.27 mark.
