US and European bonds opened higher this morning. Sentiment in Asia turned risk-off as investors pondered the impact of an indecisive outcome of the Italian election. Investors were also uncertain on potential next protectionist steps after US president Trump declared he will impose import tariffs on steel and aluminum. However, the safe haven bid for core bonds eased soon. The Bund and the US 10-y Note future soon returned most of the earlier gains. The final EMU PMI was revised lower to 57.1 (from 58. 8 in January). There was no noticeable impact on the Bund. Contrary to what was the case last week, European equities hardly suffered from political uncertainty. Most indices (ex Italy) soon returned into positive territory, preventing further bond gains. The US yield curve declines about 2/3 bps with the 5-year outperforming (-3.2 bp). German yields decline between 0.5 bp (2-year) and 3 bp (10-y). 10-year yield spreads versus Germany are mostly little changed. Italy underperforms (+8bp).
Overnight, the euro faced conflicting signals. EUR/USD jumped temporary to the mid 1.23 area as German SPD agreed to join a coalition with Angela Merkel’s CDU/CSU. However, the indecisive outcome of the Italian election caused the euro the reverse its early gains. EUR/USD dropped temporary below the 1.23 handle at the start of the European session, but there were no follow-through losses. A weaker than expected EMU PMI caused no additional losses for the euro. EUR/USD found a new equilibrium near 1.23. The headlines were not supportive for the euro, but the debate on US import tariffs is weighing on the dollar, too. Call it a balance of weaknesses. EUR/USD trades currently around 1.2310. USD/JPY gained a few ticks, trading in the 106.80 area. The US non-manufacturing ISM will be published after the redaction this report. Last week, after the positive eco comments from Fed’s Powell, it looked that eco data could again become more important for markets/the dollar. However, with the focus on import tariffs/protectionism, a big data surprise is probably needed to have a lasting impact on the dollar.
Sterling traded with a slight positive bias today. Brexit moved temporary to the background and the UK services PMI rebounded more than expected from 53.0 to 54.5. The report kept the door open for a next BoE rate hike in May. EUR/GBP declined from the mid 0.89 area to the 0.89 area. This was partly GBP strength. Euro softness in the wake of the Italian election result also played a (minor) role. Last week’s attempt of EUR/GBP to break beyond the 0.8930/50 intermediate resistance is again rejected. Cable returned to the 1.38 area.
News Headlines
Italy faces a period of political instability as Sunday’s election resulted in a hung parliament. None of the three main groups in Parliament will probably secure a majority . Five Star leader Luigi Di Maio claimed the right to form a government as he said: “The consensus we have gathered across the country paves way for us to govern”.
The EMU IHS markit final Composite PMI declined to 57.1 in February from 58.8. (flash estimate 57.5). The data suggest that the European growth momentum might have peaked. However, the IHS markit chief business economist said the level still indicates growth of 0.8% to 0.9% in Q1. The German composite PMI also declined to 57.6 from 59.0, a three-month low. The UK Markit/CIPS services PMI rose to 54.4 from 53.3. The consensus only expected 53.3. The report leaves to door open for the BoE to raise rates again at the May policy meeting.
Ministers from the United States, Canada and Mexico meet on Monday to wrap up the latest round of NAFTA talks as US President Donald Trump prepares to announce tariffs on steel and aluminum. Trump apparently ties possible exemptions for the United States’ two neighbors to a “new” NAFTA deal as well as other steps. The trade tensions are putting the Canadian dollar under heavy pressure. USD/CAD is near the 1.30 barrier.
