Markets

Core bonds extended gains today. UK Gilts outperformed after UK PM May’s umpteenth failed attempt to broker a brexitdeal. They didn’t push the Bund and US Note future higher though. Core bonds started gaining traction in the run-up to US dealings. Stock markets managed some gains in the European part of the session, but started drifting away as US participants entered dealings. Eco/events played no role of importance with US-Sino trade-related talk pulling the strings. First, the NY Times reported on possible US action against Chinese surveillance companies. Next, UK and Japanese telco’s took actions because of the US ban against Huawei. The former pulled the Chinese phones from their 5G networks while the latter delayed the launch of a new Huawei smartphone. Cautiousness remains warranted with a Chinese counter probably still looming. The German yield curve bull flattened with yields 0.3 bps (2-yr) to 2.2 bps (30-yr) lower. Changes on the US yield curve vary between -1.9 bps (30-yr) and -3 bps (5-yr). 10-yr yield spread changes vs Germany are broadly unchanged with Greece (+4 bps) underperforming.

Euro and dollar trading was again driven by headlines on the trade war. Media reported on the US measures against Huawei which might disturb the company’s supply chain. The uncertainty about the availability of updates from US suppliers is causing some if its clients to stop buying new Huawei products. Investors are looking out for Chinese retaliation measures. The trade tensions this time didn’t help the dollar. EUR/USD reversed an earlier dip and is again trading in the 1.1165/70 area. The pair still shows no clear trend at all in a broader perspective. US-German interest rate spreads narrowed again slightly in the disadvantage of the US currency. The yen outperforms, but the gains are far from spectacular. USD/JPY is trading in the 109.35/40 area. The Fed publishes the minutes of the May 01 meeting this evening. At that time, trade tension were still more modest than is currently the case. So, one can assume the majority of the Fed governors to have been rather comfortable with the wait-and-see bias. We don’t expect a big USD reaction. In theory the minutes might be tentatively USD supportive.

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Sterling faced additional headwinds as UK PM May’s final Brexit proposition wasn’t only rejected by the labour opposition but also by her DUP ally and even by a big group of MP’s of her conservative party. This broad rejection of May’s proposal suggests that no Brexit deal will be approved any time soon. It also accelerates the process of the UK PM being replaced, probably by a brexit headliner of her conservative party. This suggests an even more bumpy road ahead for the Brexit process. UK April inflation data also printed softer than expected today. However, UK data are currently only of second tier importance for sterling trading. Even so, the report further questioned the BoE’s intentions to raise its policy rate in the foreseeable future. Sterling extended its intraday downtrend after the data. EUR/GBP is trading in the 0.8825 area. Cable dropped to the lowest level since mid-January and trades currently in the 1.2650 area.

News Headlines

UK headline CPI returned north of the 2.0% BoE inflation target, printing at 2.1% in April from 1.9% in March. A rise in electricity tariffs and transportation were to blame for the rise. Still, the April price rise was less pronounced than expected. Other pipeline inflation measures also indicated modest price rises to come. Aside from the inflation data, UK house prices rose a faster than expected 1.4% Y/Y in March. April government budget data were close to expectations, but the 2018/19 budget deficit was revised lower to 1.1% from 1.2%.

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