Markets
Most European markets were closed yesterday for Easter Monday. The US Note future traded flat during European hours, awaiting the US stock market opening. Last week’s tech sell-off continued with Amazon taking the biggest part of the beating after another round of rants by US President Trump and Republican senator Rubio. US stock markets eventually closed 1.9% to 2.75% lower with Nasdaq underperforming. Retaliatory tariffs from China weighed on general risk sentiment and commodity markets as well, even if they remain limited for now (eg not yet targeted at important US soy bean exports). The new US stock market swoon provided a safe haven bid in US Treasuries, though volumes were rather low. Another strong, but close to consensus, US manufacturing ISM couldn’t change the tide. The ISM declined from 60.8 to 59.3 (vs 59.6 expected) in March. The “prices paid” component surged to 78.1, in a probable response to president Trump’s hawkish trade rhetoric/actions. The US yield curve bull steepened compared with last Thursday’s close with yields 2 bps (2-yr) to 0.9 bps (10-yr) lower.
EUR/USD is locked in an extremely narrow sideways trading range since last Thursday (1.2282-1.2345). Yesterday’s only noticeable move occurred after the US stock market opening with EUR/USD dropping to the lower bound of the above mentioned range on deteriorating risk sentiment. The move occurred mainly through EUR/JPY selling. The trade-weighted dollar also managed to preserve small daily gains, closing above 90. EUR/GBP’s intraday trading pattern resembled EUR/USD’s with one move lower, from 0.8775 to 0.8755
Today’s eco calendar remains rather thin with final EMU manufacturing PMI’s (decline from 58.6 to 56.6 expected to be confirmed) and the UK manufacturing PMI (54.7 from 55.2 expected). We expect them to be of minor importance. Minneapolis Fed governor Kashkari (arch dove) and Washington Fed based governor Brainard (dove turned neutral) are scheduled to speak, but topics suggest that they won’t touch on monetary policy. Fragile risk sentiment will remain the driving market force ahead key US eco data/events later this week. There’s no reason to row against the current tide, suggesting more gains for core bonds, while the impact on FX markets will be more subdued. There’s no reason to expect technical breaks in lasting ranges (see graphs). Some investors probably want to remain sidelined ahead of US ADP employment report, non-manufacturing ISM (Wednesday), payrolls and a speech by Fed chair Powell on the economic outlook (Friday). On intra-EMU bond markets, Italian BTP’s might become more vulnerable as president Mattarella officialy starts negotiations to form a new government.
News Headlines
The Reserve Bank of Australia kept its policy unchanged at 1.5% for a 20th straight month. No change is expected until 2019. Growth is expected to outperform this year, but inflation will only very gradually move higher. Governor Lowe specifically mentioned the risk of a potential trade war, which could undermine Australia’s current momentum and warrants the central bank to err on the dovish side. AUD/USD rises from 0.7650 to 0.7690 this morning, but that’s mainly because of a bounce in base metals.
The Times reports that British banks operating in Europe have been warned by EU regulators (ECB) that they cannot rely on a transition deal with the bloc and must implement their hard Brexit contingency plans.
The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks.
