Calm returned after a nervous European opening yesterday. The Swiss government with the UBS-Credit Suisse deal sent a shockwave through the AT1 bond market which spilled over to other market segments too. European regulators in a statement reiterated their view on the matter, stressing that shareholders remain the first in line to absorb any losses. Equities in Europe and the US eventually rebounded up to 1% in a general sigh of relief after Credit Suisse’s rescue. Core bonds gave back all or more of their early morning surge. US yields closed 4.5-13.9 bps higher in an inversion deepener. German yields at the front reversed a 30 bps decline to close less than 3 bps lower at the end. Longer-term bond yields added 1.7-5.1 bps. Appearing before the European Parliament, ECB president Lagarde stuck to her message delivered last week and said there’s more ground to cover. She did add that “Financial-stability tensions might have an impact on demand, and might actually do part of the work that would otherwise be done by monetary policy.” The impact is uncertain, she said, but it will have to be taken into account when deciding about the next move and producing the next projections. The US dollar stayed in the defensive on currency markets. DXY closed below 103.35 support, EUR/USD moved towards the 1.0735 resistance level. Sterling was boosted to EUR/GBP 0.8733, heavily testing the 0.8735 resistance area. Cable (GBP/USD) closed above 1.22 for the first time since early February. The Swiss franc tumbled against the background of improved sentiment. EUR/CHF soared to 0.9963.
The Asian session is a quiet one. Shares recoup some of the losses incurred yesterday. Helping sentiment were reports that the US is exploring ways to temporarily guarantee all bank deposits should tensions intensify. Chinese stocks outperform. Japan is closed (Equinox Day). Core bonds in thin(ner) trading eke out some gains, suggesting a lower cash yield open. The euro and the dollar take the lead with the latter having a slight edge, preventing EUR/USD to power through 1.0735. The current cautiously optimistic Asian risk mood is set to spill over into European dealings. With the sting out of the CS issue for now, we think this could color trading for today. We don’t expect any major moves though given the empty economic calendar and the Fed policy meeting looming (tomorrow). ECB president Lagarde is scheduled to speak later today but after yesterday and given the event (innovation summit), it’s unlikely she’ll give us anything new.
Minutes of the previous meeting by the Reserve Bank of Australia showed that members considered pausing the interest rate hiking cycle instead of delivering a 25 bps rate hike (to 3.6%). “Members agreed to reconsider the case for a pause at the following meeting, recognizing that pausing would allow additional time to reassess the outlook for the economy. At what point it will be appropriate to pause will be determined by data and the board’s assessment of the outlook.” The latter featured somewhat differently in the post-meeting statement which suggested that more tightening will be needed, but that in assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. AUD swap yields cede up to 10 bps this morning, though especially at the long end of the curve. Recent market turmoil already reduced the odds of additional RBA-tightening down the road, with markets pricing a cumulative 50 bps rate cuts by year-end. AUD/USD loses slightly ground this morning, switching sides around the 0.67 big figure.
The French government narrowly survived two confidence votes on its unpopular decision to push through its pension reform bill – including raising the minimum retirement age from 62 to 64 years – without a parliamentary vote. The first motion got 278 votes; only 9 short to topple PM Borne. The second no-confidence motion received 94 votes. If one of the no-confidence votes had been successful, the bill would have been nullified and Borne would have had to resign. Opposition parties are now exploring other measures such as a review by the constitutional court or a public referendum to nevertheless block the bill.