- Rates: Have bond markets reached some kind of ST exhaustion move?
Bond markets faced a sharp repositioning yesterday as investors adapted investments to the latest developments in Italy. German and US core bond yields (10-y) are nearing key support. Today, the focus remains on Italy, especially on a BTP auction. Eco data are probably second tier. Even so, we keep an eye at the German inflation data and US ADP report. - Currencies: Italian risk-off trade hammers euro. Yen resumes its safe haven role
Italian uncertainty kept EUR/USD, USD/JPY and EUR/JPY on a downward trajectory yesterday. EUR/USD is extensively testing the mid 1.1550 support. The test is ongoing. For now we see no reason to fight the Italian-driven risk-off repositioning on global FX markets.
The Sunrise Headlines
- US markets suffered losses of more than 1% yesterday with Nasdaq (-0.5%) outperforming after renewed tariff talk. Asian indices lose ground as well this morning with China and Japan underperforming (> -1.5%).
- Italy may hold repeat elections as early as July after the man asked to be PM failed to secure support from political parties for even a stop-gap government, sources said, as markets tumbled on the growing political turmoil. (Reuters)
- The US sent a sudden, harsh message to its Chinese counterparts, saying the US was moving forward with its threat to apply tariffs on Chinese imports and other actions to restrict Beijing from accessing sensitive US technology. (WSJ)
- EU officials are weighing a much stronger warning on the risk of Brexit talks collapsing without a deal if the UK fails to lay out its Irish border position in more detail next month. A firm, written proposal is regarded as necessary to move forward. (BB)
- The RBNZ said financial system is better prepared to weather any unforeseen global shocks that could push up borrowing costs, but emphasised that more needed to be done to reduce high household and dairy sector debts. (Reuters)
- Weaker growth in the Eurozone would “significantly affect Portugal”, the IMF warned, saying “lingering domestic vulnerabilities” would amplify any external shock to the former bailout country’s economic recovery. (FT)
- Today’s eco calendar contains the US ADP employment report, EC confidence data, the German labour market report and German CPI. Italy taps the bond market, the OECD releases new forecasts and the Fed publishes the Beige Book
Currencies: Italian Risk-Off Trade Hammers Euro. Yen Resumes Its Safe Haven Role
Euro near recent lows, awating next step from Italy
Yesterday, the Italian risk-off trade continued. This sell-off also had a bigger fallout on non-Italian markets than was the case lately. EUR/USD slipped to the low 1.15 area. Temporary, it looks that repositioning on Italy had reached some kind of exhaustion move. However, selling resumed as efforts to form a short-term Italian government stalled. At the same time, the US stepped up its rhetoric regarding import tariffs on China. Treasury yields nosedived as the risk-off trade ever more affected US markets. It didn’t help the euro much. EUR/USD closed at 1.1540. The upward pressure on the yen also intensified as the risk-off become more broad-based. USD/JPY fell to 108.10, but closed at 108.77.
Overnight, Asian markets are joining the global risk-off trade. For now, it doesn’t translate in further gains of US Treasuries. Also the major euro and USD cross rates (USD/JPY, EUR/USD and EUR/JPY) are taking a breather. EUR/USD hovers around yesterday’s close. USD/JPY trades near 108.60. EUR/JPY returned north of 125 after yesterday’s sell-off.
Today, the calendar is well filled with, amongst others, EC confidence, German inflation and the US ADP labour report. We see an asymmetrical risk especially for the EMU data. A negative surprise in EC confidence will add to investor nervousness on Europe. At the same time, we are keen to see the reaction of EMU yields and the euro on a substantial up-tick in German inflation. In the current environment, we doubt that it will help the euro much. The focus will remain Italian politics and on the BTP bond auction. The outcome of the attempt to form a ST government is highly uncertain, but it’s difficult to see a scenario that eases the uncertainty. If the auction fails, it would add to the crisis momentum. Yesterday, the euro sell-off slowed temporary, but there is absolutely no indication of an imminent rebound. The downtrends in EUR/USD, EUR/JPY and USD/JPY remain in place and for now we see no good reason to catch those falling knives. Next intermediate resistance in EUR/USD is the mid 1.14 area (50% retracement).
Yesterday, EUR/GBP to some extended followed the decline of EUR/USD. However, gains of sterling remained modest. Today, we see no high profile UK topics issues on the agenda. The decline of EUR/GBP remained with the established ranges. Some further selling might occur if the Italian crisis persists, but we don’t expect sterling to become a major beneficiary of EMU/Italian uncertainty.
EUR/USD: test of 1.1550 support continues as Italian crisis develops
