Markets
Yesterday, US and European Bond markets showed quite a different picture. US yields were little changed and held near recent highs. Markets didn’t change their positive assessment on the US economy for the near future even as geopolitical tensions continue to linger. Positive investor sentiment was supported by comforting comments from US Treasury Secretary Mnuchin and from President Trump indicating that the trade talks between the US and China will continue and that the immediate threat of a trade war has eased. The picture in Europa was different. Bunds rallied and peripheral spreads widened sharply as markets still pondered the potential consequences of a populist government in Italy. Fitch rating agency warned that the policy of the new Government increases the risks to the country’s credit profile. Markets were also worried on the potential consequences of the issuances of mini-BOT’s . Italian 10-y yield spreads widened 22 bp to 187 bp. Portugal (+ 19 bp) and to a lesser extent Spain (+ 12 bp) also felt the fall-out from Italy. The Bund future jumped sharply higher. The move might have been slightly distorted as some European markets including Germany, were in holiday modus. Germany yields declined between 3.8 bp (2-year ) and 5.6 bp for the 10-year. Today, the eco calendar is thin. So global market sentiment will continue to drive bond trading. In the US, yields are holding within reach of the recent peaks, but the rise is slowing. Markets want clarity on the geopolitical issues and, even more, look out whether recent positive eco data will be confirmed. In Europe, there remains a lot of uncertainty on the exact path that the new Italian coalition will go. The uncertainty on Italy also trigged quite a sharp rebound in the Bund. The 159.69/42 resistance are is coming with reach. In yield terms, 0.47% support area is also again on the radar. A re-break would be highly significant from a technical point of view. The jury is still out, but for now, we assume that a break won’t be evident.
Yesterday, uncertainty on Italy initially also weighed on the euro. EUR/USD tested the 1.1718 support area. However, a break didn’t occur and this helped to put a floor for the single currency. Later in the session, EUR/USD even reversed the initial decline and close the session with a small gain at 1.1791. So, the performance of the euro clearly was more constructive compared to the developments on the on the European bond markets. There was probably also some USD profit taking at work as USD/JPY drifted back south from an intraday top near 111.40 back to the 111 area. Today, eco data will probably again only be of second tier importance. Uncertainty on Italy will probably continue to dominated trading on European markets. If the spread widening in Italy were to ease and the decline in German yields slows, it might not be that easy for EUR/USD to break the 1.17 support area short-term.
Yesterday, sterling didn’t profit from the uncertainty on Italy. Global uncertainty and rumours that at least part of the Conservative party is considering the idea of new snap elections, probably weighed on sterling. EUR/GBP rebounded back higher in the 0.87big figure. Cable touched a new correction low below 1.34. Today, the UK monthly budget data and the CBI retail data will be published. Several BoE members including governor Carney will attend a Parliamentary hearing on the inflation report. A constructive tone from the BoE might be slightly sterling supportive.
News Headlines
Italy’s anti-establishment Five Star Movement and the far-right League have proposed Giuseppe Conte, a civil lawyer and academic, as the country’s new prime minister to lead their populist government. (FT) Meanwhile, rating agency Fitch warns Italy’s new government (policy) would increase risks to the country’s sovereign credit profile.
US Treasury Secretary Steven Mnuchin declared the US-China trade war “on hold” after Beijing vaguely promised to buy more American agriculture and energy exports. On the other hand, Mike Pompeo, the US Secretary of State, threatened Iran with the “strongest sanctions in history”. However, the US remains open to a new deal that should entail amongst others the shutdown of any enrichment of uranium.
