Markets:

Global core bonds lost ground today with US Treasuries underperforming German Bunds. International trade sentiment improved since yesterday on messages that US President Trump would delay his decision to impose auto tariffs by 6 months. The delay avoids, at least for now, trade escalations with other major trade partners (the EU, Japan). Meanwhile, the US is increasing pressure on China by restricting Chinese telecommunication companies (Huawei) from doing business in the US. After a lower opening, EU equities edged higher throughout the day. German Bunds remained initially rather resilient but eventually gave in to the improvement in risk sentiment after all. The German yield curve is moving higher with changes up to 0.9 bps (10-yr). US Treasuries lost some steam as well today as risk sentiment improved in the run-up to the US session. Solid housing data, jobless claims further declining and the Philly Fed Business Outlook indicator printing well above expectations lifted sentiment even further. US Treasuries lost additional ground. The US yield curve is bear flattening with changes in the range of +1.3 bps (30-yr) to +3.8 bps (2-yr). Peripheral spreads over the German 10-yr yield are tightening with Greece (-8 bps), Spain (-4 bps), and Italy (-4 bps) outperforming.

This morning in Europe, there was little news to guide EUR/USD trading. European equities opened cautiously in line with the price action in Asia. US action against (Chinese) tech companies illustrated that the trade war was far from over. EUR/USD hovered in tight rang in the lower part of the 1.12 big figure. Risk sentiment improved in the run-up  to the US session. US yields started a gradual rebound, supporting the dollar. The move was reinforced after the publication of the US data. US housing data, the jobless claims and the Philly Fed outlook all printed better than expected. The dollar received additional interest rate support as US yields rose further. EUR/USD slipped below 1.12 (currently 1.1190 area). USD/JPY also gained on the better risk sentiment and on growing interest rate support. The pair trades in the 109.75 area.

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Sterling continued to fight an uphill battle today. There was no UK eco news. The focus is on the battle for leadership in the UK conservative party as UK PM May faces growing pressure to resign. The internal battle within the conservative party also makes it ever more unlikely that the government will reach a deal on Brexit with labour and if so, that it has a chance of being approved in Parliament in the near future. So visibility on the next steps in the Brexit process is becoming ever more foggy. This is putting sterling further under pressure. EUR/GBP overnight cleared the 0.8723 resistance and is currently trading in the 0.89735/40 area. Cable yesterday lost the 1.29/1.2860 support area and trades in the low 1.28 area.

News Headlines:

According to local media, Italian deputy PM Di Maio said his 5 Star Movement party wouldn’t support a budget proposal that raises the Italian public debt over 140% of GDP, contradicting his colleague deputy PM Salvini. Finance Minister Giovanni Tria said the government is committed to ensure that the public finance targets will be met.

US eco data surprised positively. The Philly Fed Business Outlook rose from 8.5 to 16.6 in May. Details were more mixed. Weekly jobless claims fell from 228k to 212k, close to multi-decade lows. Building permits (+0.6% M/M) and housing starts (+5.7% M/M) both rose in April. They were the strongest in 3 months amid lower mortgage rates and the Fed’s patience.

German Bundesbank President Weidmann warned that the potential relief from interest-rate tiering, as it’s currently being discussed, would be noticeable yet insignificant. He warned for negative side-effects for the financial sector.

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