Rates: Repositioning remains ongoing
Repositioning on peripheral bond markets remains ongoing. The move might slow without fresh impetus, but don’t catch the falling knife. The German 10-yr yield closes in on 0.3% support. ECB speakers are a wildcard. Will Italian developments speed up or slow down their normalization intentions?
Currencies: How much bad news in Italy is discounted after recent euro decline?
Yesterday, an early euro relief rally was aborted. The EUR/USD downtrend continues. Uncertainty on Italy probably won’t disappear anytime soon. Even so, the euro decline shouldn’t continue at recent pace. The ECB might downplay the impact of the Italian politics on its policy approach going forward
The Sunrise Headlines
- US markets were closed for Memorial Day Holiday yesterday. Asian risk sentiment is negative overnight with China and Japan underperforming (-0.70%).
- Brussels plans to shift more than €30bn in EU funding away from central and eastern Europe, slashing Poland and Hungary’s share of “cohesion” spending while boosting support for Greece, Italy and Spain. (FT)
- The US decided to defer launching a major new sanctions push against North Korea, part of a flurry of weekend moves by both sides aimed at reviving a summit between President Trump and North Korean leader Kim Jong Un. (WSJ)
- The Japanese unemployment rate stabilized as expected in April at 2.5%, marginally above the multi decade low reached in January (2.4%). The job-to-applicant ratio stabilised at 1.59.
- British manufacturers said the government should abandon one of its main customs proposals for after Brexit. Under “maximum facilitation”, Britain and the EU would be entirely separate customs areas but would try to use technology to reduce friction and costs at the border. (Reuters)
- The UK Treasury and the Bank of England are at loggerheads over the future of City of London regulation after Brexit, with claims that relations on the issue are now “very, very bad”. (FT)
- Today’s eco calendar EMU M3 money data, US S&P house prices and consumer confidence. Several ECB members are scheduled to speak.
Currencies: How Much Bad News In Italy Is Discounted After Recent Euro Decline?
How much bad news is discounted in the euro?
Yesterday, Europe opened with a surprise relief rebound as the Italian president vetoed Eurosceptic Paolo Savona to become Finance minister. However markets soon realized that Italian political uncertainty is here to stay for an extended period of time. The risk-off trade resumed. Italian equities and bonds were sold again. The Bund rallied, raising the interest rate disadvantage against the single currency. EUR/USD dropped to the low 1.16 area. Still, USD trading was a bit distorted as US markets were closed (Memorial Day). USD/JPY traded with a slightly negative bias but held north of the 108.85/109 support area.
Overnight, Asian markets are trading with a most risk-off bias. Oil and US yields are losing further ground, weighing on USD/JPY. The pair is nearing/testing the 108.65/108.96 support. Japanese labour data were solid but had little impact on trading. The EUR/USD decline is taking a breather after recent sell-off. EUR/JPY dropped below the next big figure (currently 126.90).
Today, there are only second tier data in EMU, but several high-ranked ECB members will speak (Mersch, Lautenschlaeger, Villeroy and Coeure). Italy probably won’t be the focus of their communication. If commenting on the issue, they will likely downplay the impact of the developments in one country (Italy) on the overall ECB policy. It is far from evident that their comments will abort the EMU risk-off correction, but they probably won’t provide much arguments for the decline in core yields for the euro to accelerate further. US consumer confidence is expect to stay close the to cycle top. Italy will remain an source of volatility. Yesterday’s early short-squeeze couldn’t be sustained. So, there is no indication yet that the EUR/USD downtrend has run its course. The news flow on the US will probably also stay constructive. That said, we look for indications of a slowdown in the recent protracted EUR/USD slide. EUR/USD 1.1554 is the next high profile support on the charts. As usual, we also keep a close eye at the dynamics in EUR/JPY.
UK markets reopen after a holiday today. Yesterday, EUR/GBP followed the intraday decline of EUR/USD. There are no important UK eco data today. We don’t expect sterling to become a major beneficiary of EMU/Italian uncertainty. However, a break below 0.8713 might opt the dollar for a retest of the mid EUR/GBP 0.8650 area.
