Global core bonds lost ground today with German Bunds underperforming US Treasuries. The downleg in the Bund started yesterday evening after the official European close following rumours that next week’s ECB meeting is a “live” one. The Italian mini political crisis in May made the ECB disappear from investors’ radar with some even suggesting a blackout until after the Summer. Yesterday’s rumours met with rapid follow-up comments this morning from the likes of ECB Praet (“clear that the ECB will have to assess on June 14 whether to unwind the APP”; “signals of convergence of inflation with aim have improved”), ECB Weidmann (“market expectations for bond-buying to end this year are plausible”), ECB Knot (“reasonable to announce an end to asset purchases soon) and ECB Hansson (“higher rates are possible before mid-2019”). Risks increase that the ECB will effectively announce a new forward guidance for APP already next week instead of the traditional preannouncement first (base scenario with effective measures in July). German yields rise by 4.5 bps (2-yr) to 8.3 bps (10-yr). The belly of the curve underperforms the wings. US yields gain 2 bps (2-yr) to 2.9 bps (10-yr). 10-yr yield spread changes vs Germany range between -3 bps (Portugal) and +2 bps (Italy).
Euro strength prevailed again today even as market nervousness on Italy persisted. The focus of FX traders was on the developing debate on ECB policy normalization after yesterday’s rumours that next week’s ECB meeting was a ‘live’ meeting. It’s unsure that the ECB will already formally announce a change in APP starting in September. However, the internal debate is ongoing. Those rumours already propelled the euro yesterday evening. The euro rally continued today after ECB Praet and other MPC members confirmed that ECB is pondering the (timing of) of the next steps in policy normalization. There are still plenty of potentially euro negative factors/USD positives (Italy, strong US data in the run-up to the Fed meeting, trade tensions). However, the rising chance of a less is easy ECB policy is a good enough reason for a further EUR/USD short squeeze in a market that still was/is positioned quite short euro. The pair trades currently in the 1.1770 area. The first intermediate resistance in the 1.1830 area is gradually coming within reach. The rise in core yields (both in the US and Europe) widens interest rate differentials against the yen. USD/JPY regained the 110 barrier. There was little in the way of UK specific news today. EUR/GBP basically followed the broader rise of the euro. EUR/GBP trades currently in the 0.8770 area. So, most of yesterday’s EUR/GBP decline in the wake of a decent UK PMI was undone. In broader perspective, EUR/USD continues to hold in well-known territory.
Yesterday it got clear that UK PM May will not present a blueprint on future UK-EU relationships at the summit in Brussels later this month. Today she refused to commit to a date for publishing this plan. Officials stated earlier this week that the publishing is planned for right after the summit, but that remains highly uncertain.
The Central Bank of India has raised its benchmark interest rates for the first time since 2014 by 0.25%. The raise stems from concerns about inflationary pressures, due to the oil price, and the recent weakening of the Indian Rupee. The rate increase follows after the RBI governor Patel expressed his concerns about the turbulence in the emerging markets, partially due to a strong dollar.
The US trade deficit fell to $46.2bn in April from a $47.2bn deficit a month earlier. Boosted by higher exports and a fall in imports, the market expectations of $49bn were outperformed. The further decrease of the trade deficit is good news for President Trump, who made it an electoral priority to narrow the gap.