Rates: US 10-yr yield breaks above 3.07%. Italian politics weighs on periphery
Italian political risk could keep peripheral bond markets under pressure at least until 5SM/Lega reach a coalition agreement and publish their official plans. The US Note future will probably underperform the Bund, especially if US eco data, even second tier, remain strong. The break above 3.07% (US 10-yr), if sustained, argues further in favour of Treasury selling.
Currencies: Euro suffers from uncertainty on Italy. More to come?
The focus for EUR/USD trading turned from the USD to the euro side of the story yesterday. EUR/USD dropped (temporary?) below 1.18 on headlines that the new Italian government program would contain some controversial measures on E(M)U politics. Sterling profits from press headlines that the UK government is considering to stay longer in the EU customs union
The Sunrise Headlines
- US stock markets ended 0.25% (Dow) to 0.63% (Nasdaq) higher yesterday. Asian risk equity indices are mixed overnight with Japan outperforming (+0.5%) and China underperforming (-0.3%).
- Britain will tell Brussels it is prepared to stay in the customs union beyond 2021 as ministers remain deadlocked over a future deal with the EU. (Telegraph)
- Brazil’s central bank kept its policy rate unexpectedly unchanged at 6.5% following a strong of a dozen consecutive cuts. Policymakers cited the recent sell-off in emerging markets assets for the move. (FT)
- French energy giant Total joined other European companies in signalling they could exit Iran, casting doubt on whether European leaders meeting to try to salvage the Iran nuclear deal can safeguard trade with Tehran. (Reuters)
- A GOP-led Senate committee backed US intelligence agencies’ finding that Moscow tried to boost Trump’s campaign by hacking and spreading misinformation, a bipartisan conclusion that breaks with a House panel’s position and the president’s rejection that Russia wanted him to win. (WSJ)
- Australia’s jobless rate rose to a nine-month high of 5.6% in April as more people looked for work, but the number of employed beat expectations as more full-time jobs were added (+32.7k). (Reuters)
- Today’s eco calendar contains US weekly jobless claims and Philly Fed Business Outlook. Fed Kashkari, Fed Kaplan and ECB Constancio are scheduled to speak. Spain and France sell bonds
Currencies: Euro Suffers From Uncertainty On Italy. More To Come?
Italian politics weighs- on euro. More to come?
Earlier this week, EUR/USD resumed its downtrend. The move was mainly the result of USD strength and rising US yields. US yields rose further yesterday, but the focus for FX trading turned more to the euro. EUR/USD selling resumed on headlines that an Italian 5SM/Lega government would ask a write-down on debt held by the ECB. The parties who are negotiating a government program downplayed the issue, but couldn’t restore confidence. Italian assets were sold. EUR/USD tumbled (temporary?) below 1.18, but closed at 1.1808. US eco data (production) remained good, but harly affected USD trading. USD/JPY ran into resistance, settling in the lower half of the 110 big figure.
Overnight, Asian equities hardly profit from a good close in the US. Japan outperforms. The US 10-yr yield reached 3.1%, but for now it doesn’t trigger further USD gains. The trade-weighted USD (93.20) hovers just below the recent top as does USD/JPY (110.3). EUR/USD is changing hands near 1.1820. Australian April job growth was OK, but the 5.6% unemployment rate indicates that there is still spare capacity. AUD/USD (currently 0.7535) gained modest ground after the release.
Investors will keep a close eye on the negotiations to form a new Italian government today. Any controversial proposals to amend EU/EMU rules might weigh on the euro. In the US, the jobless claims and the Philly Fed business outlook will be released. US data recently confirmed a good momentum at the start of Q2 and we see no reason for this to change right now. However, will upcoming data be strong enough to support a further rise in the dollar after recent gains? The MT picture remains USD constructive, but yesterday’s price action suggests that the dollar rally might be losing some momentum in a daily perspective. Some consolidation might be on the cards, especially for USD/JPY. Uncertainty on Italy might cap the topside in EUR/USD. EUR/USD 1.1718 remains the next reference.
Sterling held stable against the dollar and gained slightly against a soft euro yesterday. Overnight, sterling profits from a press article that the UK would be prepared to stay longer in the customs union (beyond 2021) if that would be necessary to implement a final solution. There are no important UK eco data. The hope on some kind of Brexit compromise might continue to support sterling in a daily perspective. EUR/GBP might drift lower in the 0.8850/0.8650 trading range.
EUR/USD touched new 2018 low on Italian political developments, but no follow-through price action yet
