Global core bonds lost some ground today. The tumultuous G7 meeting didn’t impact general risk sentiment (main European indices post small gains), but the car sector for example underperforms because of the boiling trade conflict. German Bunds underperform US Treasuries in a catch-up move. Italian outperformance on intra-EMU bond markets is probably also at play. Italian assets rise following this weekend’s commitment by Italian FM Tria to the euro. The Italian 10-yr yield spread vs Germany drops by 32 bps. Greek (-24 bps), Portuguese (-13 bps) and Spanish (-7 bps) spreads narrow as well. The negative bias of core bonds might also be related to this week’s event risk. We expect the ECB to announce the next phase in its normalization process (tapering in Q4 2018 with December 2018 as end date) while the Fed could indicate to step up its tightening cycle. Both firm the bottom below European/US rate markets. The German yield curve trades 3.7 bps (10-yr) to 4.5 bps (5-yr) higher. The US yield curve bear flattens with yields rising by 2.1 bps (2-yr) to 1.4 bps (30-yr).
Trading in the major euro and USD cross rates was mainly driven by market positioning ahead of the key Fed and ECB meetings later this week. At the same time, all kind of political event risk is also still in play. Risk sentiment wasn’t too bad this morning given the noise after the G7 meeting. Constructive comments from Italian Fin Min Tria added to positive sentiment on European markets and supported the euro. EUR/USD rebound north of 1.18. However, with the Fed meeting looming, there was little appetite to push EUR/USD beyond first resistance at 1.1830/40. EUR/USD soon returned to the 1.1775/1.18 area. The rise in core US and European yields and a constructive risk sentiment is also weighing on the yen as the BOJ is not expected to change course anytime soon. USD/JPY filled bids just north of 110. EUR/JPY challenged the 130 barrier. For now both cross rates failed to take out these levels a sustainable way. Even so, the yen is at risk to stay in the defensive going into the Fed and ECB policy meetings.
This week might also be key for UK markets. The House of Commons will vote on a series of amendments to the Brexit/withdrawal bill. The outcome might have important political consequences. Additionally, eco data will give an update on the health of the UK economy. UK April production and construction data and the trade balance figures all missed the consensus by quite a big margin today, with production nose-diving and the trade deficit widening. Both domestic and foreign demand weighed on UK activity. The data question the hypothesis that the disappointing Q1 performance was temporary. For now, there is little reason to preposition for an August BoE rate hike. Poor data in a context of political uncertainty were sterling negative. EUR/GBP jumped back beyond the 0.88 barrier. Cable dropped back to the mid 1.33 area, but is currently trading off the intraday low. EUR/GBP is nearing the 0.8840/50 area, the top of the ST consolidation pattern. A break above this level would be a further negative for sterling ST.
After business warning that creating UK benchmarks would increase costs, Business secretary Greg Clark has announced that the UK wants to remain a full member of European standard setting bodies. This is again a slap in the face for hard Brexiteers.
The Turkish economy grew in the first quarter of this year by 2% Q/Q (vs 0.8% Q/Q consensus) following 1.7% Q/Q in the final quarter of 2017. These strong growth numbers don’t come cheap. The current account deficit has reached $5.426bn in April (up from $4.8bn in March) and expected inflation hit 10.47% for the coming twelve months. These results strengthens the concern of economists that the Turkish economy is overheating.