Global core bonds lost ground today. Risk sentiment in Europe improved after last week’s risk-off modus on the EC downgrading growth forecasts. The economic calendar in the US and EMU was almost empty. The German yield curve bear steepens with changes up to +4.1 bps (30-yr). US Treasuries behave similarly as positivism rises as China sounded upbeat on this week’s high level trade negotiations. A (preliminary) agreement or a signal of clear progress could lift sentiment further. The US yield curve edges higher with changes in the range of +1.9 bps (30-yr) to +2.5 bps (10-yr). Italian assets rebounded after Deputy PM Salvini’s centre-right League-party polled strongly in regional elections. The strong result could encourage the League to leave the current coalition with other Deputy Premier Luigi Di Maio’s 5SM, which investors perceive as positive for the political outlook. The Italian spread over 10y German yield tightens with 9 bps. The Spanish spread initially widened on rumours of snap elections, but reversed later as the government denied the news.

USD buying persisted by default today. Of late, the dollar was already testing some relevant resistance levels (including DXY 96.67 & USD/JPY 110) despite the Fed turning more dovish at the January meeting. Mid-morning, USD/JPY and the trade-weighted dollar finally broke those levels. A better equity performance and a modest rise in core yields were enough to push USD/JPY beyond the 110 psychological barrier. The USD/JPY break spilled over into EUR/USD trading (USD-buying). A better overall risk-sentiment and stable interest rate differentials between the US and Germany/EMU initially slowed an outright EUR/USD break lower, but the break-through finally occurred early in US dealings. EUR/USD is testing the 1.1290 area. The 1.1270/67 support is coming on the radar. USD/JPY is also extending gains (110.35/40 area). The break looks solid, but we don’t draw firm conclusions yet and wait for confirmation as Japanese markets reopen tomorrow morning after a long weekend.

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Sterling traded with a (slightly) negative bias against the euro and the dollar. For cable (1.2875 area) underlying USD strength was in play (cf supra). At the same time, the news flow was also sterling negative. UK Q4 GDP growth disappointed (cf infra) and this was also the case for December production data. This questions last week’s relative optimism from the BoE. UK PM May will already address Parliament on Brexit on Tuesday (was scheduled on Wednesday) and is said to look for more time to renegotiate the Brexit deal with the EU. EUR/GBP gained a few ticks intraday (0.8770 area) which is a rather good performance given the EUR/USD decline.

News Headlines

Headline Norwegian inflation slowed from 3.5% Y/Y to 3.1% Y/Y in January with markets expecting less of a slowdown (3.3% Y/Y). Core inflation stabilized at 2.1% Y/Y. That’s below forecasts, but still above the Norges Bank’s 2% inflation target. Markets put in doubt the central bank’s intention to hike the policy rate a second time this cycle, from 0.75% to 1%, in March. EUR/NOK rose from 9.77 to 9.83, the highest level in a month.

Spanish international news agency EFE reported that Spanish Socialist PM Sanchez is considering calling Spanish election on April 14. The rumours were later denied according to El Confidencial, who cited unnamed government officials. These stories appear one day after mass protests in Madrid against Sanchez’ minority government. This week’s budget vote in Spanish parliament might decide on the faith of the government.

UK GDP growth decelerated from 0.6% Q/Q to 0.2% Q/Q in the final quarter of last year. Details showed especially weakness in investments (-0.5% Q/Q) and net exports (-0.4% Q/Q), while consumption continued to hover around 0.4% Q/Q, in line with the past 6 quarters. There was an exceptional contribution from government spending (1.4% Q/Q). December industrial production data were dreadful (-0.5% M/M), printing a 5th consecutive decline.


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