Markets
Trading in core US and European bonds took a slow start for the new trading week. Volumes were light with UK markets closed. There were also no really important data. The US yields were little changed (unchanged for 2y; -0.5 bp for 10 & 30y yield). German bond yields currently decline up to 1 bp (5-year). 10y intra-EMU-spread changes versus Germany range between unchanged and +2bp. For now, there is no meaningful underperformance of Italian bonds, despite press headlines on the possibility of new elections in July if current attempts to form a new government would fail.
There was also no really dominant story to guide USD trading, but the swings in the dollar were a bit more pronounced than in yield markets. End last week some ‘by default USD buying’ prevailed even as the US payrolls painted a mixed picture. This cautiously USD positive momentum continued today. USD/JPY tried to sustain well north of the 109 handle. EUR/USD filled bids at around the 1.19 big figure. So, it looks that the 1.1915/35 support area might be breached. For now, the further rise of the oil price had hardly any negative impact on the dollar. Dollar strength prevailed, but the news flow was also tentatively euro negative. German March factory orders disappointed again (-0.9% M/M vs 0.5% expected). Euro selling also accelerated slightly on headlines that the political deadlock in Italy might lead to new elections, maybe as early as July. EUR/USD currently trades in the low 1.19 area. USD/JPY hovers in the 109.30 area. We look out how long higher oil prices and a strong dollar will go hand in hand. From a data point of view, the US price data on Wednesday (PPI) and on Thursday (CPI) are probably the next important reference for US yields and for the dollar.
Sterling was better bid compared to last week. Cable didn’t go anywhere, hovering in the mid 1.35 area. This was a reasonably good performance given overall dollar strength. EUR/GBP dropped back to the 0.88 area, pressured by overall euro softness. For now, it remains unclear whether UK PM May will be able to reach a compromise within her Conservative Party on the future relationship with the EU post Brexit. However, for now, this causes no additional sterling losses anymore. Sterling investors are also looking forward to Thursday’s BoE meeting. A rate hike is now almost completely price out. Maybe some investors are turning a bit less negative on sterling as the BoE might keep the door open for a rate hike later this year.
News Headlines
German industrial orders (-0.9% M/M, 3.1% Y/Y) unexpectedly dropped for the third month running in March due to weak foreign demand, data showed, suggesting that factories in Europe’s largest economy are facing headwinds from rising protectionism. (Reuters)
Italy’s two biggest political forces rejected the idea of a government of technocrats in talks with President Mattarella, increasing the chances of new elections as early as July to overcome a two-month deadlock. (BB)
China’s foreign exchange reserves in April fell more than expected, to a five-month low, as the US dollar rebounded and on growing signs that Chinese regulators are less worried about capital flight. Reserves fell $17.97 bn in April to $3.125 tn – the lowest since November 2017, compared with a rise of $8.34 bn in March. (Reuters).
