Markets:
The German Bund and US Note future started the new trading rather slowly amid an empty eco calendar. Many investors remain sidelined ahead of Wednesday’s FOMC decision. Deteriorating risk sentiment on stock markets failed to inspire safe haven flows. Trading dynamics changed around European noon when especially the Bund ceded ground via a sell-off in the UK gilt market. The move occurred after a breakthrough on a transition period and in EU-UK Brexit negotiations ahead of the EU Summit on Thursday and Friday. Reuters published an article quoting ECB sources that even the most dovish governors agree on ending APP this year with a first rate hike by mid-2019. This “consensus” scenario got a dent recently following the outcome of the “dovish” March ECB meeting, but didn’t accelerate the intraday sell-off. On the contrary, core bonds recovered most of the intraday losses at the start of US trading after a weak stock market opening and a similar rebound in UK Gilts. Changes on the German yield curve range between +0.1 bp and +1.2 bps with the belly of the curve underperforming the wings. The US yield curve shifts up to 1.2 bps (2-yr) higher, flattening the curve. 10-yr yield spread changes versus Germany narrow by 1 to 3 bps.
Sterling is king on currency markets today after chief negotiators Barnier and Davis reached a conditional deal on a transition period after Brexit. The two parties also reached complete agreement on the financial settlement and on EU citizens rights. Further negotiations in the Irish border remain required and EU Barnier repeated his mantra that “nothing is (legally) agreed until everything is agreed”. Nevertheless, the pound rallied with GBP/USD breaching through 1.40 and EUR/GBP diving towards 0.8750. Avoiding a hard brexit facilitates the BoE’s tightening process.
EUR/USD eked out some technically irrelevant gains today, returning north of 1.23. The move occurred mainly via GBP cross rates with cable outperforming GBP/EUR. The Reuters article mentioned above and weekend headlines by several ECB governors, showing more confidence in the EMU inflation outlook, provided marginal support.
European and US stock markets correct lower today. Asian risk sentiment was already slippery after rumours that Apple is developing and producing its own device displays for the first time. The German Dax underperforms with the 50d moving average dropping below the 200d moving average, painting a technical “death cross” on the charts, a bearish signal. US markets trade up to 1% lower (Nasdaq) as Brussels is preparing to hit big tech companies with a “digital tax” on EU turnover that will raise about €5bn a year according to draft proposals seen by the FT. Facebook underperforms after a data breach claim.
News Headlines:
Britain and the EU have agreed terms for a 21-month transition after Brexit, providing business with much stronger assurances that a cliff-edge will be avoided next year. UK yield increased up to 6.3 bps across the curve (10-yr) with EUR/GBP diving below 0.88, towards 0.8750.
The Belgian debt agency tapped OLO 79 (€0.95bn 0.2% Oct2023), OLO 80 (€1.7bn 0.8% Jun2028), OLO 84 (€0.57bn 1.45% Jun2037 and OLO 80 (€0.37bn 2.15% Jun2066). The combined amount sold (€3.58bn) was close to the upper bound of the intended €3-3.6 bn with a strong auction bid cover of 1.95. The Belgian debt agency now completed 42.2% (€13.08bn) of this year’s OLO funding plan (€31bn)
ECB policymakers are shifting their debate to the expected path of interest rates as even some of its most dovish rate setters accept that lucrative bond buys should end this year, sources close to the discussion said.
