Markets
There were no important data in the EMU and the US today. Still, the test of key US yield levels continues and this move remains important for other markets (including equities and FX). The US 2-year yield is trying to clear the 2.5% hurdle. The US 10-y yield is holding north of 3.0%. The 3.05% 2014 top is within reach. The 30-y yield (3.19%) is also closing in on key 3.20/3.25% resistance. Markets have become more sensitive to potential upside inflation risks. The recent rise in oil prices was an important catalyst (even as prices eased slightly yesterday and today). At the same time, markets are preparing for a next batch of important US eco data starting with the Q1 US GDP release on Friday. Combined with next week’s US ISM’s, the payrolls and the statement of the May 2 Fed meeting, markets should have a clearer view on the Fed’s intentions for the June meeting (and maybe even for later this year) at the end of next week. The US yields are abound 1 bp higher currently. German bunds again outperform US Treasuries with yields rising less than 0.5 bp. European bond investors are cautious to join the repositioning in US yields ahead of tomorrow’s ECB policy meeting/press conference. Intra-EMU yield spreads versus Germany are little changed. Remarkable given the rise in core yields.
The same themes that drove FX trading yesterday are still at work today. Dollar strength prevails as markets ponder the consequences of US yields testing/breaking key resistance levels. In the recent past, interest rate differentials often played only a limited role as a driver for USD trading. However, to the extent that markets anticipate that upcoming US data might reinforce the case of three rather than two additional Fed rate hikes this year, the ever growing interest rate differential finally comes to support the dollar. At the same time, markets expect the ECB to maintain a soft tone at the April policy meeting. Tomorrow, we will know whether this assessment is correct. EUR/USD is trading in the 1.2180 area. The 1.2155 support is coming ever closer. The yen remains weak against the overall strong dollar. Contrary to what was the case yesterday, the rally in EUR/JPY shows tentative signs of fatigue. This might be due to euro softness. Or is it an indication that at least some safe have flows might return to the yen if global sentiment on risk were to deteriorate further?.
There were also no important eco data in the UK. Sterling was mostly driven by global market trends. Cable kept downward intraday bias as the dollar remained well bid across the board. EUR/GBP lost a few tick on a daily basis. EUR/USD declining below 1.22 probably caused some modest spill-over effects on EUR/GBP, too. The pair trades currently in the 0.8740 area. Cable is changing hands around 1.3935/40. In the UK, the debate whether the UK/UK government should retain the option of staying in a customs union with the EU continues. For now it is far from clear to what side this domino will fall. The day-to-day gyrations in this debate have little impact on sterling.
News Headlines
US equity markets find themselves between a rock and a hard place. US corporate results mostly came out better than expected. Today positive surprises of Twitter en Boeing did catch the eye. At the same time investors are worried about the impact of higher yields. US equity markets open little changed, but soon came again under pressure. Most European indices are losing between 1.0% and 1.75%.
German economy Minister Altmaier indicated that the German government cut the 2018 growth forecast from 2.4% to 2.3%. He also expects no significant contribution from foreign trade to growth. 2019 growth was set at 2.1%. The Minister said that the economic upturn is continuing. He is concerned about international trade developments but hopes that a trade war can be avoided.
