Markets
European bonds records modest gains today. Financial markets are digesting the EU election results, while US/UK markets are closed for the day. Mainstream EU parties held better ground against the populist-nationalist wave than expected, but the election result is more fragmented the ever. Although equity markets opened with gains, EU bonds moved higher as well. The combination of US/UK markets being closed and an empty eco calendar lead to very low trading volumes. Italian BTP’s fell on rumours that the European Commission is considering a disciplinary procedure for Italy next week over its failure to rein in debt. That could lead to a €3.5bn penalty fine. The German yield curve is bull flattening with changes up to -2.7 bps (30-yr). Peripheral spreads over the German yield remained rather stable, with Greece (-20 bps) outperforming and Italy (+ 8 bps) underperforming. Current Greek PM Tsipras called snap elections as his Syriza party suffered a crushing defeat, in favor of the opposition party New Democracy. Investors hope a new government will shift the fiscal mix towards a more growth-friendly manner. In Belgium, the extreme-right Vlaams Belang became the second biggest in Flanders and the Federal election result suggest difficult coalition negotiations are ahead. However, that didn’t impact the Belgian yield spread.
Trading in the major FX cross rates was mostly contained to tight ranges. Liquidity was thin as US and UK markets were closed for a holiday. Early this morning, EUR/USD tried to extend last week’s rebound as the event risk of the EU parliamentary election had passed without causing a disorderly, anti-EU outcome. However, the move almost immediately ran in to resistance. EUR/USD settled in the 1.12 area. European equities traded with a positive bias but also didn’t help the single currency. In the afternoon, the euro even lost modest ground on headlines that the EU commission is considering disciplinary action against Italy for not complying with EU budget rules. EUR/USD is currently trading in the 1.1190 area. In technical trade, USD/JPY rebounded off last week’s correction low and is changing hands in the 109.50 area.
Sterling surprisingly gained some modest ground this morning even as the eurosceptic Brexit party of Nigel Farage succeded a landslide victory in the EU parliamentary election. However, one should give too much weight on today’s sterling price action as UK markets were closed for a holiday. Later in the session, in technical trade, sterling reversed earlier strength. EUR/GBP is again trading in the 0.8830 area. The outcome of the EU parliamentary election probably will make the issue of a potential no-deal Brexit a key point in the election race for a new leader of the conservative party. In this scenario, any sustained sterling gains look premature.
News Headlines
The European Commission approved the extension of Italy’s state guarantee scheme until May 2021 on Monday. The scheme provides Italian banks with a state guarantee on the least risky tranche in bad loan securitization sales. It was originally launched in 2016 and has allowed banks to sell about $50 bn euros of non-performing loans so far, according to EC estimates.
Germany’s Financial Stability Board has suggested the introduction of a countercyclical buffer of 0.25% for banks, the country’s Finance Ministry said today. It is meant as a precautionary measure to ensure lending should there be sustained economic downturn. Banks have one year to set aside the extra capital, starting from July 1.
The EC considers to propose a disciplinary procedure for Italy next week, a result of the country’s failure to rein in debt the way it first promised. Italy risks a $4 bn fine but the EC’s move is only one step in long process and a final decision may not come for months.
