With no important data on the agenda, markets were awaiting guidance after last week’s remarkable repositioning, especially on core bond markets. The setback on German/EMU bond markets continued as investors are counting down to Thursday’s ECB meeting. The ECB will probably repeat that accommodative financial conditions remain necessary across the EMU. However, progress in the vaccinations and better eco prospects going forward apparently made investors conclude, that a modest rise yields shouldn’t be seen as ‘unwarranted’. German yields rose between 0.8 bp (2-y) and 2.7 bp (10-y). At -0.23%, the German 10-y yield is nearing the -0.20%/-0.15% LT range top. The European 10-y swap yield even tested the 0.11% February top. Last week’s US bond rally slowed. Shorter maturities were little changed (5-y -0.2 bp). Long-term yields rose 2.5/3 bp for 10’s and 30’s. The US 10-y yield tries to regain previous support at 1.58%/1.60, but the jury is still out. The bottoming in US yields didn’t help the dollar. EUR/USD jumped well north of the 1.1990/1.20 resistance, closing at 1.2037. USD/JPY tumbled in the 108 big figure to close at 108.17. A correction in (US) equities (Dow -0.36%, Nasdaq -0.98) maybe also supported a bid for the yen. Sterling showed remarkable strength (cable up from 1.3835 to close at 1.3986). Despite a solid euro performance, EUR/GBP dropped from 0.8665 to close at 0.8606. We didn’t see any UK-specific news.
Sentiment on Asian markets remains cautious. Japan still underperforms (Nikkei -2.0%). China outperforms (+0.5%). Dollar weakness persists with DXY index below 91 and EUR/USD at 1.2060. The yuan gains further, with USD/CNY trading below 6.50 (6.497). US treasury yields are marginally higher. In the Minutes of its April policy meeting, the RBA assessed that its policy helped to prevent further AUD strength. The RBA will also monitor trends in home borrowing as property prices continue to rise. AUD/USD extends its recent rebound, trading just below the 0.78 big figure.
The US and EMU eco calendar is again almost empty. Technical considerations will prevail. The uptrend in German yields remains in place, but a sustained break of the -0.20%/-0.15% area probably won’t be easy before the ECB meeting. In the US, we look out whether the US 10-y yield can regain the 1.60 area in a sustained way. If so, it might help to slow the recent USD decline. Still, the picture of the US currency obviously deteriorated. The next resistance for EUR/USD comes in at 1.2103 (62% retr. Jan peak). Recent sterling strength might be evaluated against the UK data update today and later this week. EUR/GBP hovered in the 0.8615/10 area with labour data OK, but probably a bit outdated from a market point of view.
German CDU leader Laschet got the backing of the party’s executive committee to take a run at the Chancellorship later this year (September 26). Laschet faced an unusual challenge from Söder, the leader of the Bavarian sister-party (CSU) as the CDU/CSU bloc was/is collapsing in the election polls (29%) with Laschet’s popularity being sub-zero. The 43-headed executive committee voted 31 in favour of Laschet and 9 for Söder with 6 abstentions. While the executive vote is probably disproportionally skewed towards Laschet, Söder ahead of the meeting said he would respect the decision. The CSU needs to confirm Laschet’s nomination. The German Green party, which currently polls second at around 22%, chose party co-head and member of parliament Baerbock as it first-ever nominee for Chancellor.
China’s benchmark lending rates remain unchanged for the 12th month running, respectively at 3.85% for the 1-yr tenor and 4.65% for the 5-yr tenor (key for mortgages). The status quo had been expected as the PBOC also kept the rate on its medium-term lending facility unaltered at 2.95%. The latter serves as a base for lending rates.