Markets
Domestic and global topics triggered an accelerating sell-off in both on bond and equity markets with especially the long end of the bond curves underperforming. Yields in the UK, German/EMU and Japan hit “highest levels since…”. US Treasuries which recently reacted more muted also incurred ‘more-than-modest’ losses. The UK again severed as a point in case. At 5.85% , the UK 30-y yield closed at levels not seen since May 1998. UK yields rose between 12.3 bps (2-y) and 19.2 bps (30-y). Markets a are pricing a Andy Burham ‘risk premium’ as the Manchester Major is preparing a path to challenge Keir Starmer’s position as PM via a local by-election next month. Other developed countries are not in exactly the same political situation of the UK, but the nature of challenges is similar. The war in the Middle East and disruptions in supply of oil and other commodities on Friday further raised risk premia on global markets, as headlines suggested that the US and Iran are not moving any closer to any workable agreement to end the war and reopen the Strait of Hormuz. Brent oil closed at $109.2/b. US President Trump this weekend again showed impatience with Iran not giving in to US demands. It illustrates the persistence to the (military & political) stalemate. Trump’s visit to China at least also didn’t bring any specific help for a solution to the conflict. US yields on Friday jumped between 5.2 bps (2-y) and 11.2 bps (10-y). The US 2-y yield now rose well beyond the 4% barrier. Markets are pondering a scenario were the Fed will be forced to raise its policy rate around the turn of the year. German yields added between 8.6 bps (2-y) and 12.4 bps (10-y). At 3.67%, the 30-y yield is touching highest levels since mid-2011. EMU money market are embracing a scenario where the ECB will raise its policy rate by at least 75bps by the turn of the year. For equities, the bond market rout this time wasn’t compensated for by positive earnings headlines. US indices declined up to 1.54 % (Nasdaq). The Euro Stoxx 50 lost 1.81%. The global risk sell-off this time was hefty and clear enough for the USD to reclaim its traditional safe haven role. DXY closed the week at 99.28, to be compared to sub 98 levels at the start of last week. EUR/USD dropped below intermediate support at 1.1655 to close near 1.1625. After a long period of remarkable resilience, sterling also fell prey to the risk sell-off, with EUR/GBP closing north of 0.87.
This morning, the market narrative doesn’t look much different from Friday, with most Asian equites deepening losses. The eco calendar is thin today. So, Friday’s theme’s will still set the tone. We continue to look for comments from ECB members to further clarify their reaction function. This week in the UK, we well get the monthly eco update including inflation data on Wednesday. On Thursday, PMI data will give a new ad-hoc eco and inflation update.
News & Views
The Japanese Prime Minister Takaichi instructed the finance ministry to compile an extra budget to tackle rising commodity prices. She had previously said such measures weren’t necessary but with prices of the likes of oil stubbornly high and rising and reserve funds for other relief measures (e.g. the JPY 170 gasoline price cap) running dry, Takaichi is now changing tac. An extra budget this early in the new fiscal year means it will most likely be funded through additional borrowing. Although its scale isn’t decided yet, fragile (global) bond markets already hit by inflation and fiscal fears are on tenterhooks. Japanese yields are surging this morning with the 40-yr tenor at some point up 17 bps. Gains currently amount to 7 bps at the longest segments of the curve (30-yr-40yr), still enough for the highest levels since its inception. Rising risk premia pressure the yen towards USD/JPY 159 with much of the FX interventions end-April and early-May being undone.
S&P rating agency raised Bulgaria’s credit outlook to positive from stable while keeping the rating at BBB+. It reflects “the potential for Bulgaria’s income levels and growth to strengthen, supported by improved political stability, planned reforms, and EU fund disbursements.” This followed a breakthrough in Bulgaria’s five year political stalemate after former president Radev’s party secured an absolute parliamentary majority in the April 19 snap elections. Political paralysis is expected to make way for reforms which combined with Eurozone entry should support Bulgaria’s gradual income convergence with that of peers. Economic growth is seen at averaging 2.6% through 2029 with the Middle East conflict only a moderate drag in the short term due to the country’s diversified energy mix. 2026 inflation could amount to 5.3%, materially up from 3.5% expected earlier due to energy prices. Budgetary performance has weakened in recent years, but S&P sees gradual consolidation from the 3.5% of GDP in 2025
