Markets:
Global core bonds lost marginally ground today amid an empty eco calendar. The market move is somewhat remarkable as yesterday’s trading themes remained at play. US tariffs on steel and aluminum raised fears of trade wars. President Trump added fuel to the fire by stating that trade wars are a good thing and easy to win. European stock markets lose again up to 2%, but no longer support core bonds. It’s an indication that general sentiment towards core bonds is structurally negative. Rising real rates, higher inflation expectations and a hawkish shift in tone by the Fed are the main drivers behind US yields’ push higher. Technically, the German 10-yr yield failed to break below 0.62% support. Yields can start a new upleg if worst case scenarios are avoided in this weekend’s political events (Italian elections, SPD vote on coalition agreement). The US yield curve bear steepens at the time of writing with yields 1.4 bps (2-yr) to 3.4 bps (30-yr) higher. The German yield curve bull flattens with yields up to 2.4 bps (30-yr) lower. An overnight effect is at play as US yields corrected lower yesterday evening. 10-yr yield spread changes versus Germany widen up to 2 bps with Greece (-7 bps) underperforming.
Yesterday’s announcement of US president Trump on import tariffs abruptly aborted a tentative USD rebound. This theme remained the dominant factor for global FX trading today. There were hardly any eco data to guide trading. The USD decline slowed temporary this morning. Markets apparently pondered the seriousness of the consequences. However, the risk-off trade intensified again as US president Trump indicated that he wouldn’t backtrack on his intentions, triggering a new USD downleg. EUR/USD jumped back above the 1.23 area. USD/JPY extended its downtrend. The pair dropped below the 105.50 area. The political event risk in Europe (Italian elections and SPD approval of German government coalition) has no negative impact on the euro for now. USD weakness prevails.
Sterling trading was driven by the potential consequences of UK PM May’s Brexit speech for the negotiations between the EU and the UK. Over the previous days, it became already clear that the water between the UK and the EU remains very deep. Today’s speech didn’t bring much progress on the way to a solution. UK PM May put forward five tests for the Brexit negotiations. However, the implementation of those principles, e.g with respect to the Irish boarder, will meet EU objections. Sterling was in the defensive (against the euro) earlier this week and May’s speech didn’t change that. EUR/GBP tries to regain 0.8930 intermediate resistance. Cable gained marginally ground today, as the dollar and sterling both faced serious headwinds. The pair trades close to, but slightly below 1.38. The UK construction PMI was marginally stronger than expected, but it was no issue for sterling trading.
News Headlines:
The Norwegian government announced that it will lower the Norges Bank’s inflation target from 2.5% to 2%. The Norges Bank will adopt a forward-looking and flexible approach toward inflation targeting so the policy can support the economy and counter financial imbalances, according to the statement.
President Donald Trump’s planned tariffs prompted angry responses from U.S. allies around the globe Friday, driving down stock prices and generating warnings of a possible international trade war. EU trade commissioner Malmstrom said that the EU will consider imposing its own safeguard tariffs on imports of steel and aluminium.
British PM May called for a deep partnership with the European Union after Brexit, setting out ambitions for a tailor-made deal with independent arbitration and new arrangements for regulation and financial services.
