German Bunds and US Treasuries edge higher in sympathy today. Chinese data overnight lead investors to believe more Chinese stimulus was around the corner, pushing Chinese equities more than 2% higher. European equities opened higher as well, supported by a solid, but as expected, German first quarter GDP result. However, immediately after the EU opening, the tide turned and risk-off prevailed again. German Bunds jumped higher and held an upward bias throughout the day. The German yield curve is bull flattening with losses up to -5.8 bps (30-yr). The German 10-yr yield fell intraday to -0.13%, the lowest level since 2016, but partly recovered ahead of the US opening. US Treasuries climbed higher as well and set an intraday peak after retail sales printed well below expectations in April. A stronger-than-expected Empire Manufacturing gauge offered little resistance, especially when a little after the industrial production data disappointed as well. The US yield curve is edging lower with the US 2-yr yield (-4.8 bps) falling below 2.16%, the lowest level since February 2018. Italian BTP’s continued declining as fears of a standoff between the Italian government and the EU over the fiscal deficit surfaced again. President Mattarella even discussed a possible government break-up and hinted at a new election date. Peripheral spreads over the German 10-yr yield are widening with Italy (+8 bps) and Spain (+4 bps) underperforming.

Global markets entered a diffuse trading pattern today. However, this time the euro suffered more than the dollar on the global uncertainty. This morning, Asian/Chinese markets reacted remarkably positive to poor Chinese data as investors hoped for more policy stimulation. European equities tried to copy this optimism at the start of trading. However, initial gains were almost immediately reversed, starting an elongated intraday risk-off trade. Both German and US yields declined substantially. EUR/USD gradually drifted back below 1.12. EMU data were not to blame. EMU and German Q1 growth both printed as expected (0.4% Q/Q). Maybe European investors were more worried on the potential fall-out from decelerating growth in China. Negative headlines on Italy (including widening EMU spreads) remained a euro negative, too. In the US, April retail sales and production printed weaker than expected, suggesting ongoing soft consumer spending at the start of Q2. The report supported calls for a Fed rate cut, but had little impact on EUR/USD. The pair is trading in the 1.1185 area. USD/JPY (109.30 area) dropped on yen strength as global uncertainty persists. Today’s ‘classic’ risk-off trade was completed by a further slide in EUR/JPY (122.30 area).

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Sentiment on sterling remained fragile today. There were no important UK eco data. Talks between labour and the government continue, but markets have little faith on a constructive outcome. EUR/GBP is touching a new short-term top near 0.8700. The 0.8723 resistance is coming on the radar. The combination of sterling weakness and relative USD strength is pushing cable back to the mid 1.28 area.

News Headlines

Headline inflation in Canada rose 0.4% M/M in April. The Y/Y-measure returned to 2.0% (from 1.9%). Part of the rise was due to a levy on carbon taxes, raising gasoline prices. Some underlying inflation measures were marginally softer than expected. In this respect, the report doesn’t rally support the case for further BoC rate hikes. The loonie lost marginal ground after the publication of the report.

The International Energy Agency warned that the oil market could face a shortage. The IEA said “considerable uncertainty” about global supply emerges (US sanctions on Iran/Venezuela and ongoing conflicts in Libya), while global oil demand will grow more slowly than previously thought.


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