Global core bonds eked out some gains today, but they remain relatively small given losses on stock markets (-1% and more). Risk sentiment is negatively influenced by this weekend’s escalation in the trade conflict with China retaliating Friday’s US measures. The automotive sector takes an additional hit after Audi CEO Stadler was taken into custody in the diesel-cheating scandal. Higher oil prices probably helped tilting the balance in the Bund with Brent crude rebounding from $72.5/barrel to $74.5/barrel. Rumours indicate that OPEC+ won’t increase production as much as proposed by Russia and Saudi Arabia. The bloc meets in Vienna on Friday. German Chancellor Merkel took the sting out the migration quarrel between her and CSU Interior Minister Seehofer by accepting a 2-week deadline to win European agreement on a tougher policy. This time buying removed another positive short term factor for the safe haven Bund. The eco and event calendar was empty, but heats up later this week with the ECB’s Sintra conference and EMU PMI’s. US yields decline by 0.6 bps (2-yr) to 1.5 bps (10-yr) at the time of writing. The German yield curve shift up to 1.3 bps (5-yr) lower. Peripheral yield spreads vs Germany narrow by 2 to 5 bps.
EUR/USD: The escalating trade conflict between the US and China and political uncertainty in the UK and Germany left investors in a risk-off mood at the start of the new trading week. European equities joined the decline from Asia. However, the risk-off sentiment hardly supported core US and European yields. A similar indecisiveness was also visible in EUR/USD. The pair dropped to the 1.1565 area early in European dealings, but soon returned back to the 1.16 area. For now, the political topics dominating the market talk didn’t cause any additional euro selling. The risk-off trade hardly affected USD/JPY trading. The pair is holding in the mid 110 area. For now, the dollar fails to profit from rising overall uncertainty even as recent CB action suggests that USD will maintain a big interest rate differential over the euro and the yen. Eco data were second tier and largely ignored as a driver for FX trading.
GBP: the never-ending Brexit battle within the Conservative Party continued to dominate market headlines. The House of Lords is expected to approve a proposal on the ‘meaningful vote’ issue that is unacceptable for the UK government and for the pro-Brexit MP’s of May’s Conservative party. If so, the law will return to the House of Commons on Wednesday. A harsh positioning of both sides could cause a defeat for PM May with big political consequences. The direct impact from the Brexit noise on sterling remains modest. At the same time, it doesn’t help sterling. EUR/GBP trended higher, above 0.8750. The ongoing political uncertainty and mixed UK eco data will probably make to BoE cautious to revive market expectations on an August rate hike at Thursday’s policy meeting.
CSU interior minister Horst Seehofer has lifted his ultimatum on his proposed changes to Germany’s asylum policy (refusing refugees at the border who are already registered as asylum seeker in another EU country). Merkel has now a chance to find an agreement at the EU summit later this month that would make Seehofer’s proposal unnecessary.
The German Bundesbank has projected that the German economy should rebound in the second quarter after disappointing results in Q1. However, the 2.0% growth estimate for this year is well below the 2.5% projection of December last year.2019 growth is estimated at 1.9% (from 1.7%).
The Belgian debt agency tapped 4 OLO’s today: OLO 79 (€0.58bn 0.2% Oct2023), OLO 85 (€1.52bn 0.8% Jun2028), OLO 75 (€0.93bn 1% Jun2031) and OLO 78 (€0.57bn 1.6% Jun2047). The combined amount sold was the maximum of the targeted €3.1bn-€3.6bn. Total OLO issuance stands at €22.04bn so far this year, which is already 71% of the stated €31bn OLO funding target.