Markets
Last week ended with another joint sell-off in stocks and bonds after solid April payrolls. The report provided the Fed with all the arguments to continue its recently beefed up tightening pace, even as monthly wage growth disappointed marginally. Wall Street shed up to 1.4% (Nasdaq). US bond yields added 2.8 (2y) to 10.6 bps (30y) in a steepening move. European swap yields rose 6.2 bps (2y) to more than 10 bps at the long end. A series of ECB governors (Holzmann on Thursday, Villeroy and Vasle on Friday) flagged the possibility of a rate hike already in June and helped to launch the move. Germany’s 10y yield in particular was eyepopping. An 8.8 bps surge hurled the closely watched reference beyond 1.06% resistance (2015 top) and made it already test the next target at 1.13%. Friday’s yield rise came mainly on the account of real yields, both in the US and the euro zone. Peripheral spreads rose marginally with Greece (+4 bps) underperforming. EUR/USD left intraday lows sub 1.05 behind after the ECB comments. The pair eventually didn’t make it much further compared to opening levels though (1.055). A strong trade-weighted dollar closed near cycle highs at 103.66. Sterling licked wounds inflicted by the openly divided Bank of England. EUR/GBP extended its break above the 0.8512 resistance to 0.855 – the highest since early December.The Asian-Pacific equity scoreboard is all red this morning. Without much other news to trade on, investors have no option but to focus on high inflation, rapid monetary tightening and soaring growth prospects. Losses range between 1 and 4%. Core bonds tried but failed to capitalize on the risk-off. The dollar starts in pole position in FX markets, the Chinese yuan slips on lockdown-impacted trade data (see below). The British pound looks little affected by the historic victory by the Northern Irish Sinn Féin nationalists.Economic data won’t guide markets much today. It does get interesting later this week with US CPI on Wednesday, UK GDP numbers on Thursday and an avalanche of central bank speeches, including from ECB president Lagarde, starting from tomorrow on. For today, there’s quite some nervousness about Russian president Putin’s speech during the May 9 Victory Parade. Risk-off may hold a tight grip, keeping the likes of the euro and sterling in the defensive. EUR/USD 1.05 remains a heavy gravitational force. EUR/GBP very recently swapped a month’s long downward trend channel for a narrow upward sloping one. EUR/GBP 0.8595 is next short-term resistance. Last Friday underscored the bearish momentum in core bonds. We don’t question the trend. The US 10y is testing final intermediate resistance ahead of the 2018 top (3.26%).
News Headlines
Chinese lockdowns hampered production and supply/shipments while slowing demand, affecting the country’s exports and imports. Exports in April slowed from 14.7% Y/Y to 3.9% Y/Y. Import growth came to a stand-still (0.0%) after a marginal decline in March. This resulted in a further rise of the Chinese trade surplus from $47.38 to $ 51.12 bln. The trade data confirm the growth risks for the Chinese economy. Chinese Prime Minister Li warned on the grave and complicated employment situation in both cities and, despite the lockdowns, instructed official institutions to giving priority stabilize employment, illustrating the ongoing difficult balancing act in the Covid strategy. The yuan this morning weakens further with USD/CNY jumping north of 6.71.
