Markets

Global core bonds are close to unchanged. Following yesterday’s risk-off rally, when EU/US equity markets fell and core bonds jumped higher, risk sentiment was mixed overnight. The White House proposed tariffs on goods from countries found to have undervalued currencies, targeting i.a. China, Japan and South Korea. Core bonds stabilized and lost marginal ground ahead of the EU opening bell. Despite EU equities trading cautiously higher throughout the day, German Bunds proved resilient. UK PM May announcing her resignation was the talk of the day, but had no impact on bond trading. With an empty EMU eco calendar, moves in the German Bund are muted. The German yield curve is cautiously edging up with yield gains up to +0.8 bps (30-yr). Moves in US Treasuries were similar as the cautious risk rebound spread to the US session as well. Chinese messages that no official talks took place on a Trump-Xi meeting supported US Treasuries only marginally. US factory data (durable goods orders) declined, but printed close to expectations. The US yield curve is mixed with yield changes varying between -0.2 bps (10-yr) to +0.9 bps (2-yr). Peripheral spreads over the German 10-yr yield tightened with Greece (-8 bps) and Italy (-8 bps) outperforming as Italian deputy PM Salvini struck a more conciliatory tone on changing the EU fiscal rules.

USD traders were looking for guidance today after yesterday’s intraday setback of the dollar. Yesterday, a poor US PMI suggested that the US economy is also at risk to face stronger headwinds from the trade war. The dollar might lose further interest rate support. At the same time, the US intending to take action against countries whose currencies are too weak against the dollar, can be seen as an indication that the US is targeting a weaker dollar overall. EUR/USD briefly filled bids just north of 1.12, but the move couldn’t be extended. EUR/USD settled again in the high 1.11 area awaiting guidance from the US. At the start of the US session, China’s Ambassador in the US made some guarded comments on the current status of the US-China trade talks. US yields, equities and the dollar lost a few ticks. The US April orders for durable goods also printed below expectation. EUR/USD rebounded to the 1.12 area, but there was again no follow-through price action. USD/JPY changing hands in the mid 109 area as US (and UK) investors look forward to a long weekend.

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UK PM May announced today she will step down as leader of the conservative party, marking the end of an era in UK politics. Sterling gained modest ground after the statement and EUR/GBP dropped (temporary) to the low 0.88 area. After recent sterling decline, quite some negative news is probably already discounted. The inability of EUR/GBP to clear the 0.8840 resistance has also maybe inspired some investors to reduce sterling short exposure going into a long weekend. EUR/GBP dropped temporary to the low 0.88 area. UK April retail sales also printed better than expected, but we doubt this helped sterling much. In a longer term perspective, the UK and sterling are probably heading for a new period of elevated uncertainty. The battle to replace May might be intense and the new leader is expected to pursue a harder Brexit than May did. Ultimately, a no-deal scenario might again be on the radar. Tough comments from Boris Johnson this afternoon confirmed this scenario. The post-May sterling rebound is already undone. EUR/GBP is again testing the 0.8840 area. Cable is changing hands in the upper half of the 1.26 big figure.

News Headlines

US/Sino trade talks must be based on mutual respect, a Chinese representative said today. He added that dialogue is the only way out of the trade dispute but suggested that a meeting between Trump and Xi won’t occur in the near future. US equity futures and rates edged lower.

US data slightly disappointed. Durable goods orders decreased (-2.1%) in April little more than expected (-2.0%) and had the March figures revised downwardly. Capital goods shipments (excl. aircrafts), considered a proxy for the US GDP capex component, flatlined vs. a slight decrease expected but March figures were cut to -0.6% (vs. 0.0% earlier).

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