Headlines
European stock markets opened stronger after yesterday’s WS gain, but had difficulties to safeguard them. US stock markets opened flat to 0.25% lower.
Theresa May has started the two-year countdown to Brexit as she formally notified the EU of Britain’s intention to quit. The PM called it a "great turning point in our national story", but her letter and statement to MPs marked a new tone of conciliation and compromise, promising to approach talks in a spirit of "respectful, sincere co–operation".
Manuel Valls, the former French prime minister, will vote for Emmanuel Macron in the upcoming presidential election, the biggest Socialist party name to abandon the ruling party’s official candidate in favour of the centrist frontrunner.
Greece has agreed with its lenders on key labour reforms, spending cuts and energy issues, moving closer to clinching a deal before a meeting of euro zone finance ministers on April 7, sources close to the talks said.
ECB policymakers are wary of making any new change to their policy message in April after small tweaks this month upset investors and raised the spectre of a surge in borrowing costs for the bloc’s indebted periphery. One ECB source said the bank has been overinterpreted by markets at its March 9 meeting.
Rates
Anxious ECB Lifts Bund
Global core bonds traded with an upward bias today with Bunds outperforming US Treasuries after Reuters quoted sources indicating that the ECB is wary of changing its message again after the "overinterpretation" of the March policy message. At the time of writing of writing, German yields decline by 5.5 bps (5-yr) to 2 bps (30-yr). Changes on the US yield curve range between – 1.8 bps (30-yr) and -2.4 bps (2-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Greece outperforming (-19 bps) on supportive talk pointing in the direction of a bailout review agreement at the April 7 Eurogroup meeting.
Intraday, the Bund traded with an upward bias from the start of European trading despite the strong equity market opening and rising oil prices. Given the empty eco calendar, we think that technical end-of-quarter buying was at play. Eventually, oil prices and stocks also could built on their positive momentum. Just ahead of US dealings, the Bund really started outperforming as Reuters quoted ECB sources who indicated that the central bank was surprised by the market reaction after the March ECB meeting given the marginal changes. They are wary of making new changes in April as markets would interpret them as an approaching normalisation of monetary policy. The article states that the ECB wants to reassure investors that their easy monetary policy is far from ending. Additionally, a further rise in yields would hurt countries like Spain, Italy and Portugal where debt payments are a major cost item and rising yields would curb spending and thwart growth. Chicago Fed Evans repeated earlier comments in the US session, saying that he backs 1 or 2 more rate hikes this year.
The Finnish debt agency successfully tapped the on the run 7-yr RFGB (€1B 0% Sep2023). The auction bid cover was decent at 1.57. Later today, the US Treasury ends its refinancing operation with a $13B 2-yr FRN auction and a $28B 7-yr Note auction. Currently, the WI of the latter trades around 2.22%.
Currencies
EUR loses interest rate support
The dollar rebounded yesterday as the reflation trade resumed after strong US data. Today, the picture for the dollar was again more diffuse. EUR/USD declined further below the 1.08 handle, but the move was inspired by a decline in EMU yields rather than by outright USD strength. USD/JPY traded with a slight negative bias as there was little follow-through price action on yesterday’s US risk-on trade. The pair struggles not to give away the 111 level.
Overnight, Asian equities showed only modest gains despite yesterday’s rebound in the US. Oil traded off the recent lows and so did the dollar. USD/JPY tried to extend gains north of 111. EUR/USD hovered in a tight range in the low 1.08 area.
European equities had some catching up to do on WS gains yesterday. However, there were no real follow-through gains. Without important eco data on the agenda, technical considerations prevailed for EUR/USD trading. Yesterday’s late session USD rebound probably wrong-footed EUR/USD longs who took their position on recent speculation that the ECB might scale down policy stimulation sooner than expected. So, USD strength triggered (stop-loss) euro weakness.
There were also no important eco data in the US. However, early in US trading interest rate markets also faced a repositioning. After the recent narrowing of US/EM (German) interest rate differentials, spreads widened again. The trend already started this morning, but accelerated on rumours that ECB sources said that markets had over-interpreted changes to the March ECB statement. The subsequent decline in European yields (and US-EMU interest rate differentials) also further changed the balance between the euro and the dollar. EUR/USD filled bids in the 1.0740 area and trades currently in the 1.0750/50 area. We see it as a correction on ‘excessive’ euro strength of late, rather than outright USD strength. The price action of USD/JPY apparently confirms this view. The pair dropped back below the 111 handle as yesterday’s risk-on rebound slows today. In this respect the jury remains out whether the dollar will be able to profit from a continuation of the reflation trade.
Sterling shows no clear pattern as ‘real’ Brexit starts
The UK finally triggered article 50 of the Lisbon treaty, starting the official procedure to leave the EU in two years’ time. Investors had plenty of time to adopt positions for this event. Still, some last-minute reposition had to be done. Sterling was quite aggressively sold in (thin) Asian markets this morning, but rebounded going in to the official announcement of Brexit. The statement of Theresa May and the first answer of EU’s Tusk were quite conciliatory. EUR/GBP filled bids in the 0.8625 area after the Brexit statements, but regained some ground afterward. The pair trades currently in the 0.8662 area. We are reluctant to make any direct link between the Brexit communication and the performance of sterling today. Euro weakness also played a role. The swings in cable were more modest. Contrary to a decent performance against a weak euro, sterling is trading rather soft against the dollar (1.2420 area).
