- European equities fell prey to most profit taking showing losses of about 0.5%. Italy underperforms. US equities also trade with modest losses of 0.1% /0.2% as the recent rally is running into resistance.
- Germany’s influential Council of Economic Experts has warned that the eurozone’s largest and most powerful economy is in danger of overheating. The Council expects 2.2% growth in 2018 after 7 years of strong growth. Potential growth is estimated at 1.4%.
- British businesses expect to increase the pay rises they offer staff over the next year, as it becomes increasingly difficult to attract and hold on to workers, according to a BoE survey, supporting its confidence that the recent squeeze on living standards will ease. The BoE found recruitment difficulties were "above normal" in many sectors
- Donald Trump on Wednesday warned North Korea not to "underestimate" America, as he wrapped up a two-day visit to South Korea that analysts widely regarded as a foreign-policy success. Mr Trump also did not employ the fiery rhetoric he has previously directed at North Korea, although he reminded Pyongyang that the US had positioned serious military assets in the vicinity of the Korean peninsula.
- Discussions on the long-term sustainability of Greece’s debt are expected to start after the conclusion of a review of reforms by its lenders, PM Tsipras said. He told lawmakers that discussions with lenders were progressing well. The government has previously said that talks with lenders on the bailout review would be concluded by January.
- Poland’s central bank kept interest rates on hold (1.5%) in the face of rising price pressures. A dovish majority on the 10-person MPC has to contend with only two members who urge a rate increase now or next quarter, with two others open to a hike once growing wage pressure pushes inflation above target.
Rates
Bund higher in technical/sentiment driven trading
In a technical, sentiment-driven and data-free session, core bonds continued to drift higher, flattening the curves, as they did in the past four sessions. Gains remained modest, though. The German 5-yr Bobl tap was okay, but not great. At the time of writing, German bonds outperform US Treasuries slightly. The German yield curve flattens with yields dropping between 0.2 (2-yr) and 0.9 bp. US yields are little changed between 0.4 bp (2-yr) and flat (10-yr).
The Bund might have got some help from weaker equities and technical oriented traders. They drove the Bund for a first test of the contract high (163.43) mid-morning. The Bund hesitated and lingered around that level until a second attempt in early afternoon pushed it through the resistance, with an intra-day top at 163.63. This time with equities flat-lined or even rebounded modestly. That suggests technical Bund trading was indeed part of today’s story. The test isn’t over yet with the Bund coming slightly off the intra-day highs as lack of follow through buying might disappoint the technically oriented bulls. The upcoming $23B 10-yr T-Note auction later today may weigh somewhat on US Treasuries.
On intra-EMU bond markets, 10-yr yield spreads versus Germany reversed yesterday’s narrowing, widening between 3 (Italy) and 7/9 bps (Portugal & Spain). The widening might been partly due to Portuguese fresh supply, even as the auction yield was the lowest ever for a 10-year bond (1.94%). The bid/cover of 1.57 was rather weak, but only due to the higher-than-usual amount issued. In the case of Spain, political tensions amid low trading ahead of a holiday may explain the underperformance, even as political tensions in general had only modest impact in past months. .Semi-core 10-yr spreads (Belgium/France) widen 1 to 2 bps. Peripherals and semi-core underperformed due to Bund strength on the back of a technical break higher (new contract high).
Currencies
Yen outperforms as risk rally falters
Trading in the major USD cross rates was again technical in nature in absence of eco data. Sentiment on risk turned less buoyant, as investors took some profit on the global equity rally. Uncertainty on the progress in the US tax bill was also a sources of investors caution. USD/JPY (113.50 area) and EUR/JPY (131.65 area) suffered from the risk-off bias. At the same time, the euro remained in the defensive as EUR/USD struggled not to fall below the 1.16 mark. Interest rate differentials moved marginally against the single currency.
Several regional indices held near multi-year/record levels in Asia this morning, but the upward momentum eased. The latest up-leg in the global risk rally had only a limited impact on core bond yields. This also hampered the upside momentum in USD/JPY. The pair struggled not to fall below the 114 big figure. EUR/USD (1.16 area) traded off yesterday’s correction low (EUR/USD 1.1533). Even so, the setback of the dollar remained modest.
There was absolutely no economic news to guide FX trading this morning and changes in interest rate differentials were negligible. If anything, they widened marginally in favour of the dollar. EUR/USD held an extremely tight sideways range roughly between 1.1610/1.1585. European equities opened mildly positive but fell prey to profit taking. This tentative risk-off trade also weighed on the likes of EUR/JPY and USD/JPY.
The trends from Europe continued during the US session. USD/JPY drifted further south in the 113 big figure (currently 113.50 area). Uncertainty on the progress in the US ‘tax bill architecture’ was probably one of factors of investor cautious. Still, it had little impact on EUR/USD. EUR/JPY was also a victim of today’s investors caution (currently 131.65 area from 132.15 this morning). EUR/USD trades just below 1.16. The German bund trying to regain an important technical level was probably a euro negative, too.
Political uncertainty haunts sterling again
On Friday and earlier this week, sterling reversed most of the decline triggered after last week’s soft BoE policy statement. Markets apparently hoped for some progress in the Brexit negotiations that restart this week. However, UK politics again came to haunt sterling today. There were plenty of press reports that UK PM May is weighing to fire International Developments Secretary Patel on unauthorized contacts with Israel officials. If so, it would be the second removal of a UK Cabinet member within a week. Aside from the internal turbulence within the UK government, EU policy makers continue to stress the need for more clarity on the UK separation bill, trumping hopes that Brexit negotiations would lead to a positive result anytime soon. Cable dropped from the 1.3175 area and currently trades just below the 1.31 big figure. EUR/GBP rebounded to the 0.8860 area.
