Sunset Market Commentary

Markets

Core bonds mostly traded marginally stronger after yesterday’s post Powell sell-off. EMU February inflation printed soft as expected (1.2% Y/Y and 1.0% Y/Y core), but the reaction on European bond markets was close to non-existent. The Bund future contract trended higher in the lower half of the 159 big figure. However the key 159.75 resistance (which corresponds with the 0.62% 10-y yield level) stays intact for now. The US 10-y Note future is holding within reach of recent correction low. Markets probably want further confirmation on yesterday’s positive message on the US economy from Fed chairman Powell. The US yield curve shows a corrective bull flattening with the 30-y outperforming (-1.9 bp). Two year US bonds underperform (+0.6bp) as markets ponder the chances of four Fed rate hikes later this year. The German yield curves also flattens slightly with the 30-year yield declining 1.2bp.

The (trade-weighed) dollar held near the post-Powell correction top, but there were no sustained follow-through gains. EUR/USD continues testing the 1.22 support area. The pair touched a minor correction low this morning but no break occurred. EMU inflation (1.2% headline and 1.0% core) was soft as expected but had no impact on markets. The second revision of the US Q4 GDP brought little news. US yields/interest rate differentials also provided no trigger for further sustained USD gains, not against the euro nor against other majors. Markets want confirmation on Powell’s optimistic assessment from hard US data. This cross-check might be provided by the early month key US economic data that will published starting tomorrow. EUR/USD hovers close to, mostly slightly north of 1.22. USD/JPY struggles not to fall below the 107 barrier.

Today, the focus for sterling trading was on the Legal Brexit draft text of the EU. In the comments after the release of the draft , EU negotiator Barnier said that there is no guarantee on a transition period with full access for Britain the to the signal market. The EU also proposed Northern Ireland to follow EU rules to avoid a hard border, a solution that is inacceptable for the UK. Sterling was sold after the comments of EU’s Barnier. EUR/GBP jumped to the 0.8840 area. However, the established ranges remain perfectly intact. The combination of sterling weakness and dollar strength pushed cable to the 1.3825 area. Markets are now looking forward to the official response of UK PM May in her Brexit speech expected on Friday.

European equity markets mostly show limited losses after yesterday’s setback on US equity markets and this morning’s sell-off in Asia. Major US indices opened with gains of about 0.25%.

News Headlines

Euro zone inflation slowed to 1.2% Y/Y in February from 1.3% in January, the lowest level since December 2016. Core inflation was unchanged at 1.0%, as expected. The data question whether the ECB should start preparing markets for further policy normalization in the near future.

Sweden’s GDP grew 0.9% in Q4 from Q3 and 3.3% Y/Y. The report was close to consensus (1.0% Q/Q and 3.4% Y/Y). However, January retail sales disappointed at 0.1% M/M and 1.2% Y/Y vs 0.4% M/M and 2.9% Y/Y expected. The retail data raised concerns on the Riksbank’s intention to start policy normalization in the second half of this year. The krona weakens further with EUR/SEK testing a multi-year top near 10.10.

The EU proposed Northern Ireland to maintain most EU rules after Brexit under a draft treaty published on today. The draft contains the EU proposal to avoid a hard border between Northern Ireland in the Irish Republic. However it caused anger in London and Belfast. EU’s Barrier also repeated that a transition period is not guaranteed and said that time was running out for a deal.