Markets
Core bonds declined marginally on Friday even as uncertainty on global trade persisted after US president Trump indicated he intends to impose import tariffs on steel and aluminum. The rise in US yields was supported by a late session equity rebound. The German 10-yr yield failed to break below 0.62% support, indicating that global sentiment on core bond remains fragile. Today, the eco calendar contains the final EMU services/composite PMI’s. The US non-manufacturing ISM is expected to ease slightly to 59.0, which still points to healthy growth. There will be plenty of headlines on the political stalemate in Italy and on a potential trade war after recent comments on import tariffs from US president Trump. A risk-off context might be a temporary positive for core bonds, but we don’t expect a big leap higher. The US deficit story and rising inflation expectations remain longer term negatives for (core) bonds. The Bund might temporary outperform but the price action end of last week indicated that 0.62% remains a tough support for German 10-y yields. Italian bonds might show some modest underperformance.
President Trump announcing import tariffs abruptly aborted a tentative USD rebound last week. The USD decline slowed on Friday, but the dollar remained in the defensive as Trump indicated that he wouldn’t backtrack on its intentions. EUR/USD jumped back above 1.23. USD/JPY extended its downtrend. This morning, the euro gained temporary as the German SPD approved the new German government coalition. However, the political stalemate after the Italian election soon removed the shine off the euro. EUR/USD is again trading in the 1.23 area. Global uncertain on a potential trade war weighs on the trade-weighted dollar and on USD/JPY. There might be temporary euro caution due to political uncertainty in Italy. However, the global trade frictions (or the easing of this threat) will probably remain the main driver from USD trading in the short-to-medium term. We start the week with a neutral bias on EUR/USD. The EUR/USD 1.2155 area looks not easy to break a long as trade frictions dominate the headlines. USD/JPY remains most vulnerable.
On Friday, UK PM May advocated some kind of tailor-made trade deal between the UK and the EU after Brexit. In this context, she also admitted that neither of both parties can exactly have was they want. There were some cautiously positive reactions from the EU to the speech, but the hard work on the specifics of the deal have still to be done. The sterling decline gradually slowed. EUR/GBP closed the session at 0.8927. Today, the UK services PMI is expected to rise marginally from 53.0 to 53.3. The EUR/GBP 0.8930 intermediate resistance was extensively tested last week, but no sustained break occurred. This suggests that further GBP losses are maybe not that evident as long as the EU and UK are on speaking terms.
News Headlines
Italy faces a prolonged period of political instability after voters delivered a hung parliament in Sunday’s election. Initial results indicated that euro-sceptic Five Star Movement and the anti-migrant League were among the election’s winners. With no one group reaching a majority, weeks of horse-trading will be needed before a new government can be appointed.
China still aims to expand its economy by around 6.5 percent this year, the same as in 2017. However, the economy exceeded the government target printing at 6.9% in 2017. At the same time, China is stepping up its efforts to contain financial risk and secure stability. In this respect it lowered the budget deficit target to 2.6% from 3.0% in the past the years.
Germany’s SPD approved another coalition with Chancellor Angela Merkel’s conservatives, clearing the way for a new government. Two thirds of the membership voted “yes” to the deal, a wider margin than expected. Angela Merkel could be sworn in for a fourth term as early as the middle of the month
