Core bonds eked out gains today with German Bunds outperforming US Treasuries. We assume that some investors want to take a cautious approach going into the weekend, but the magnitude of the move in the Bund market doesn’t stroke with what’s happening on other markets. Stock markets record more gains and mixed to better Q2 earnings from US banks won’t alter that picture. The EMU eco/auction/event calendars were empty and Brent crude is trying to fight back. US import/export prices were mixed, but are overshadowed by the further increase in PPI and CPI earlier this week. German yields drop by 0.3 bps (2-yr) to 2.3 bps (10-yr) on a daily basis. US yields drift 0.4 bps (2-yr) to 1 bp (5-yr) lower. 10-yr yield spread changes vs Germany are nearly unchanged with Italy outperforming (-6 bps). Yesterday’s strong BTP auction might still be at play. Comments by Italian FM Tria, who argued in favour of slowing down debt reduction and upping infrastructure spending, went unnoticed.

There was little high profile (eco) news to guide FX trading today. European equities opened in positive territory but the momentum wasn’t nearly as buoyant as was the case yesterday in the US. Investors were looking for a new story as the trade war moved temporarily to the background. Core bond yields even declined, with Bunds again outperforming Treasuries. The US/German interest rate differential widened further. In a context of no big other news this was enough for the dollar to maintain the benefit of the doubt. EUR/USD dropped to the 1.1615 area. USD/JPY hovered close to mostly slightly north of 112.50, but the uptrend slowed. US bank earnings were not able to fully meet high expectations, capping further equity gains. Contrary to CPI and PPI data earlier this week, US import prices were slightly softer than expected. The dollar rally slowed this afternoon. EUR/USD trades again in the 1.1640/45 area. Maybe the dollar rally isn’t over yet, but at least today there isn’t enough fuel to keep it going.

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Yesterday, sterling profited slightly as markets pondered potential next developments in the wake of the publication of the White Paper setting out the UK Brexit plans. The report could be considered as a proposal for a relatively soft Brexit, but hurdles on the way to a concrete, workable agreement remained very high. Sterling hardly profited. On the contrary. Overnight, sterling lost again a few ticks as US President Trump indicated that the May approach makes a US-UK trade deal difficult. The impact on sterling was modest. EUR/GBP settled close to mostly slightly north of 0.8850. Later in the session, Trump backtracked on his critics with regard to May’s Brexit approach. Sterling regained a few ticks. Even so,  for now, investors clearly see not enough progress in the Brexit process to turn less sceptic on sterling. BoE Cunliffe, a dovish MPC member, was rather positive on the economy but still warned of raising rates too quickly. We didn’t see any lasting impact on sterling from the comments. EUR/GBP currently trades in the 0.8840 area.

News Headlines

JP Morgan Chase kicked off the new US corporate results season, reporting an 18% profit increase and beating estimates, as did Citigroup (16% profit increase). The banks profited from higher interest rates and Trump’s tax cut. Wells Fargo, however, remained below the bar as the tax effects couldn’t offset the Fed’s sanctions and a slowdown in its mortgage activities.

Evidence suggesting that the economy is likely to generate “relatively gentle” inflation pressure has not persuaded BoE’s deputy governor Jon Cunliffe, arguing for caution in raising interest rates. Yet, Cunliffe agrees with the BoE’s view that the economy is recovering from the 1Q temporary slowdown.

As Chinese growth is slowing down due to the country’s continued deleveraging campaign and the US trade battle, PBOC’s chief researcher Xu said China should make more use of the “ample room” in fiscal policy it has and fine-tune its monetary policy to support the economy.


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