Markets

Global core bonds are mixed with US Treasuries outperforming German Bunds. Most EU markets re-opened after being closed for the long weekend. German Bunds traded with a downward bias, tracking yesterday’s modest losses in the US Note Future. Modest losses for EU equities didn’t translate into gains for core bonds, in a low-volume trading session. ECB governor Coeuré said he sees no policy argument for tiering the negative interest rates, but had no impact on trading. The German yield curve is mixed with changes up to +1.2 bps (10-yr). US Treasuries moved little higher overnight, partly recovering from yesterday’s losses, and moved sideways throughout the European session ahead of the 2-yr Note auction and housing data. The latter attracts extra attention following recent disappointing US housing data. As US investors joined trading, sentiment turned. The US 10-yr Note spurred higher without a clear trigger, dragging German Bunds along. The US yield curve moves lower with losses up to -2.9 bps (5-yr). Peripheral spreads over the German 10-yr yield are stable with Italy (+6 bps) underperforming on reports of government tensions and an upcoming rating review by S&P.

EUR/USD trading remained technical in nature as there were few data to provide directional guidance. The pair hovered in a tight range in the mid 1.12 area during the morning session. A tweet of US president Trump suggested that more US retaliation on EU tariffs might be on the cards. There was no immediate FX reaction to the Trump headlines. However, the dollar captured a better bid going into the US trading session. EUR/USD dropped to the low 1.12 area. USD/JPY tries again to regain the 112 handle reversing a brief downtick this morning in Asia. We didn’t see a specific trigger for the USD uptick. US corporates mostly reporting earnings ahead of expectations maybe was a slightly USD supportive. CHF weakness against the dollar is also a potential euro negative. Headlines/rumours on rising political tension in Italy also didn’t help the euro.

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Over the previous two weeks EUR/GBP traded with a cautious positive bias drifting higher in the 0.86 big figure. Today, there were no important UK eco data. Markets looked for any progress in the Brexit debate as UK politicians returned from the Eastern holiday recess. For now, there are few indications that the negotiations between the conservative party and labour will result in an agreement anytime soon. At the same time, there are plenty of headlines that UK PM’s leadership is again being contested in her own conservative party. For now this has no additional negative impact on sterling. EUR/GBP even declined as the 0.8700/0.8723 resistance is seen difficult to break short-term. EUR/GBP dropped to the mid 0.86 area.

News Headlines

ECB’s Coeuré dismissed the case for a tiered deposit system aimed at offsetting the side effects of negative interest rates, saying that “there is no evidence so far” that they have been detrimental to lending. He also suggested that the new TLTRO series may be less generous than the previous round.

Eurozone government debt to GDP decreased from 87.1% to 85.1% in 2018 but intra EMU dispersion is wide. Greece posts a stunning 181.1% ratio but extended its budget surplus to 1.1%. Italy (132.2%) and Portugal (121.5%) are the blocks other major laggards and showed budget deficits of -2.1% and -0.5% respectively.

Saudi Arabia is said to plan a limited response to the tougher US stance against Iranian oil exports but it wants to see a decline in Iranian shipments first before engaging in any significant output increases. Oil prices retreated from the intraday highs after the news got public. Currencies of oil-reliant countries (the likes of CAD, NOK) slipped.

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