US Treasuries and German Bunds edged higher today. Markets took a breather yesterday but that proved to be short-lived. This morning, Chinese state media signaled a lack of interest to continue trade talks with the US under the current threat to escalate tariffs and the absence of “sincerity”. Core bonds jumped higher on the news. Despite some easing when European equity markets opened, core bonds maintained an upward bias throughout the day. A final reading of the EMU core CPI rose 1.3% (Y/Y), more than the 1.2% expected, but the result was ignored by markets. The risk-off prevailed, especially with cross-party Brexit negotiations breaking up in the UK. The German yield curve is edging lower with changes varying between -0.3 bps (2-yr) to -1.7 bps (10-yr). The tide turned ahead of the WS opening, as US president Trump confirmed that the auto tariffs (that would have hit EU and Japan most) will be delayed for at least 180 days. Core bonds fell on the news, albeit rather modestly. US investors still eye the University of Michigan sentiment gauge for May later today. At the time of writing, the US yield curve is moving lower with changes up to -2.3 bps (10-yr). Peripheral spreads over the German 10-yr yield are tightening with Italy (‑4 bps) outperforming.

Earlier this week, EUR/USD reversed a cautious rebound from earlier this month. The new flaring up in the trade war didn’t help the euro anymore. Yesterday, the dollar profited temporary from a (re)widening of the US-German interest rate differential on good US eco data. Today, EUR/USD trading entered some kind of no-man’s-land. There were few eco data in Europe and the US. Sentiment on risk remained fragile as Chinese sources indicated that the country wasn’t convinced whether or not it would continue the trade talks in current negative context. This weighed on European equities. The risk-off trade kept EUR/USD, EUR/JPY and the USD/JPY on an (albeit cautious) downward trajectory. European and US yields declined more or less in lockstep. The EUR/USD and USD/JPY downtrend slowed in the run-up to the US open. The trend even turned as the White House confirmed that it prolonged the deadline for talks on Japanese and EU auto imports by six months. Still, the market reaction to the announcement was modest. Even so, EUR/USD (1.1180 area) is trading off the intraday low. The gain of USD/JPY (109.60) is negligible.

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The sterling decline from earlier this week simply continued as political disarray in UK politics intensified. Labour leader Jeremy Corbyn in a statement indicated that the talks with the government on a Brexit deal have become almost impossible as the government isn’t able to deliver a compromise. The break of the talks with labour make an approval of May’s Brexit deal early June very unlikely. At the same time, the battle for leadership of the conservative party continues. The roadmap for the Brexit process is becoming ever more unpredictable and weighs on sterling. EUR/GBP is trading in the 0.8760 area. Cable lost a next big figure and is trading in the 1.2750 area.

News Headlines

UK opposition leader Corbyn walked out of talks with PM May’s Conservatives to find a compromise Brexit deal. He said that only “significant changes” would bring him back to the negotiating table. May is now expected to schedule a 4th vote on het Brexit deal in parliament early June.

US President Trump officially delayed imposing levies on imported car and car parts from the EU, Japan and other nations for 180 days, opening space for negotiations without first escalating the conflict.


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