Headlines
European stock markets lose slightly ground with the French CAC 40 underperforming as Mélenchon gains more ground in French presidential election polls. US stock markets shrug off Asian/European hesitance and open around 0.2% higher.
Sentix investor sentiment in the euro zone improved more than expected in April to remain at the highest level in almost 10 years, shrugging off risks linked to a closely watched presidential election in France.
Greek ministers and inspectors from the EU and the IMF will resume talks over a bailout review in Athens in late April, sources close to the negotiations said. Last week, Greece and its official lenders reached a preliminary deal on measures Athens must implement after its current bailout expires.
Czech central bank’s exit from currency cap regime should be followed by increasing interest rates, Governor Rusnok said. He sees the tightening cycle start late 2017, early 2018. EUR/CZK declined further to 26.50. Czech inflation accelerated to 2.6% Y/Y in March, in line with expectations.
Brent crude rose towards $56/barrel, supported by another shutdown at Libya’s largest oilfield and heightened tension over Syria following the US missile strike.
Rates
France underperforms as Mélenchon overtakes Fillon
Global core bonds initially profited from safe haven flows. The Bund outperformed the US Note future. Latest French election polls provided the bid for Bunds and caused French underperformance (stocks and bonds). Extreme-left candidate gains ground and currently polls third, overtaking Fillon with 18%. Frontrunners Macron and Le Pen still lead the bunch with around 24%. Mélenchon’s rise increases the tail risk of a presidential run-off vote between extreme left and extreme right which is the worst outcome from a market point of view. Japanese finance Ministry & central bank data also showed that Japanese investors offloaded a record amount of French sovereign debt (€12.85B) in February. The up-leg of the Bund petered out around European noon amid an empty eco calendar. Brent crude continued its impressive rally. Since the end of March, the oil price rose from $50/barrel to $56/barrel. Since the start of US dealings, core bond trading remained confined to narrow ranges.
At the time of writing, the German yield curve bull steepens with yields 1 bps (2-yr) to 0.7 bps (30-yr) lower. The US yield declines by up to 1.5 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany vary between -9 bps (Greece) and +3 bps (France/Italy/Ireland). Greece continues to outperform following last Friday’s agreement between the government and bailout monitors on additional reforms in exchange for the next aid tranche. The Italian and Irish underperformance is supply-related (auctions on Wednesday) while French bonds suffer from extreme-left candidate Mélenchon’s gradual rise in the polls, overtaking Fillon in third place.
The US Treasury starts its mid-month refinancing operation later today with a $24B 3-yr Note auction. Currently, the WI trades around 1.54%.
Currencies
USD: Uneventful sideways trading
The dollar traded fairly uneventful in a news-poor Monday session. Some follow through USD/JPY buying during the Asian session and some minor French election-related risk-off spiced the sideways trading session. EUR/USD hovered between about 1.0595 and 1.0570 and trades now a shade off the 1.0590 opening level. USD/JPY made a trip to 111.60 from 111.10 in Asian trading, but gradually eased to 111.20 at the time of writing.
Overnight, USD/JPY in a follow up action after the US payrolls release on Friday made some further gains reaching an intraday high at about 111.60. However, the upward momentum faded and the pair slowly etched lower in the European morning session. Equities were under some pressure and German-French yield spreads widened as extreme-left candidate Mélenchon gains ground and currently polls third. He overtook Fillon with 18%. Frontrunners Macron and Le Pen still lead the bunch with around 24%. Mélenchon’s rise increases the tail risk of a presidential run-off vote between extreme left and extreme right which is the worst outcome from a market point of view. It marginally weighed on the euro. EUR/USD slid from 1.0595 to an intraday low of 1.0570. around European noon. However, as equities stabilized order driven return action sent the EUR/USD pair back to opening levels as we close our report. US-German yield differentials didn’t change and the eco calendar was nearly empty. USD/JPY hovered sideways in the afternoon session and changes hands at about 111.20, 10 ticks from opening levels.
Cable gains some ground after Friday’s big losses
EUR/GBP remains prisoner in a tight 0.85 to 0.86 range. Today, sterling took the "upper hand" as the French election tail risk became a tad fatter. Far-left Mélenchon climbs higher in the polls and while he is still 7%-points behind Le Pen- Macron, it might still become more interesting. EUR/GBP very gradually slid from 0.8550 to 0.8530. Cable, which got hard hit on Friday, recouped some of its losses moving from 1.2370 to 1.2420. The move is technically irrelevant, but cable was nevertheless the top performer of the day. There wasn’t really a story behind the move.
