Markets

Markets shifted to a reluctant risk-off mode awaiting a speech of US President Trump. Later today, the US president is expected to announce US action against China, a response to the country imposing a new security law and strengthening its grip on Hong Kong. European equities are mostly losing between 0.5% and 1.5%. US markets also opened with, albeit modest, losses after a late session setback yesterday. Specifics on actions against China remain uncertain, but markets apparently assume that the US will try to avoid too much economic damage. Eco data in Europe and the US were interesting, but with little direct impact on markets. EMU headline inflation declined to 0.1% Y/Y. Core inflation printed marginally higher than expected at 0.9% Y/Y. Even so, the data are no obstacle for the ECB to raise the amount of bond purchases under PEPP at next week’s regular policy meeting. German April retail sales declined much less than feared (-5.4% M/M versus -12.0% expected) but French consumer spending declined an awful -20.2% M/M after already a steep setback in March (-16.9%). US spending (-13.6% M/M) data were also shockingly weak despite a surprise rise in income (+10.5% M/M!) due to government support programs. Both US and EMU yield curves show a modest bull flattening. US yields decline between 0.4 bp (2-y) and 2.1 bp (10-y) with the very long end slightly deviating/underperforming (-1bp). Similar picture for German Bunds. Yields ease between 1.5bp (2-y) and 2.2 bp (10-y). A more cautious risk sentiment slowed the recent trend of intra-EMU spread narrowing with a modest corrective widening for 10-y spreads versus Germany in Italy (+5 bp) and Greece (+3bp).

Most interesting moves again occurred at the currency markets. Despite the risk-off, the dollar remains under pressure and the euro is keeping a ‘remarkable’ positive momentum. Some end of month repositioning maybe was in play. Even so, the trade-weighted dollar dropped below high profile support at 98.27, even as the intraday USD-downtrend halted early in US dealings. Still, the overall picture of the US currency incurred some cracks this week. If confirmed, this DXY break would be relevant from a technical point of view. EUR/USD filled offers in the 1.1145 area but eased back to currently trade in the low 1.11 area, though still recording a nice weekly gain. USD/JPY hovers in the lower half of the 107 big figure. Sterling also showed some wild intraday swings. EUR/GBP jumped above the 0.90 reference and rallied to the 0.9050 area, but currently trades again in the 0.901 area. Today’s break shows that sterling remains vulnerable going into next week’s last round of EU-UK Brexit talks.

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News Headlines

Italian central bank governor Visco warned his home country that it should not accept European aid without also implementing a “comprehensive package of reforms”. His comments came after second GDP data readings showed Italy contracted even more than the flash reading suggested (-5.3% q/q vs. -4.7%) and as some members of the government claimed the funds for lowering taxes (Di Maio) rather than growth supporting investments.

The EU’s top diplomat Borrell said governments expressed “grave concern” during a ministerial meeting over China imposing the controversial security law in Hong Kong, adding that it “undermines the one country, two systems principle”. However, unlike the US, Borrell said that EU sanctions aren’t the right tool for dealing with the matter.

Canadian GDP contracted  -8.2 q/q annualized (-10% expected) during the first quarter of this year, nearing the record decline during the GFC of -8.7%. Household consumption printed a -9% drop while gross fixed capital formation (including housing investment) fell a more modest -0.3%. The loonie trades little changed.

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