Markets
Yesterday, global trade tensions and an inconclusive outcome of the Italian elections caused a good start for core bonds, but the flight to safety bid eased soon as European equities (ex-Italy) returned into positive territory. The EMU PMI was revised to 57.1 (from 58. 8 in January), but had no impact on bonds. The US non-manufacturing ISM printed at a strong 59.5. US equities started an intraday up-leg as several high-ranked Republican politicians tried to convince President Trump no the implement tariffs on steel and aluminum. At the end of the day, US yields rose about 1.5 bp, the 2-year outperforming (-0.4bp). German yields declined less than 1 bp, 30 yr underperforming (+0.7 bp). Italian 10-y yield spreads versus Germany widened 4 bps.
Today, the eco calendar is thin. European investors look forward to Thursday’s ECB meeting. Given the ongoing low inflation, the ECB is unlikely to make a U-turn in its communication. In the US, factory orders will be published and Fed’s Dudley will speak. Global risk sentiment and the US debate on trade and tariffs will likely set the tone for trading. Markets are growing more confident that Trump’s announcement last week won’t have a big impact on global trading. Some further losses in core bond might be on the cards. However, bonds probably won’t break key support until the tariffs’ issue is really out of the way. 119-14 is the cycle low in the 10-y Note future (corresponds with the 2.95 % 10-y yield). The bund might slightly outperform ahead of the ECB meeting.
Yesterday, EUR/USD showed no clear trend. The pair dropped temporary below 1.23 early in Europe as the political uncertainty in Italy weighed. However the setback was short-lived. EUR/USD settled in the lower half of the 1.23 big figure. Later, the USD didn’t succeed any meaningful gains against the euro even as US equities rallied and as fear for a trade war eased. USD/JPY (and EUR/JPY) profited from the intra-day rise in core yields and the equity rebound. USD/JPY regained the 106 barrier. This morning, the risk rebound continues in Asia. For now it doesn’t help the dollar much. USD/JPY reversed opening gains is again trading in the low 106 area. EUR/USD is gaining marginally further ground. With few eco data on the calendar and the US ‘tariffs’ issue still pending, we expect more technical trading in EUR/USD. Expectations for a relatively soft ECB might cap further euro gains. EUR/USD trades in neutral territory (middle of the 1.2155/1.2555 trading range).
Sterling traded with a slight positive bias yesterday. Brexit moved temporary to the background and the UK services PMI rebounded more than expected, keeping the door open for a BoE rate hike in May. EUR/GBP declined from mid 0.89 to the 0.89 area. There are no important UK data today. BoE’s Haldane will speak in London this evening. 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
U.S. President Trump is facing pressure from political allies and U.S. companies not to implement proposed steel and aluminum tariffs. White House adviser Cohn is preparing a meeting with US companies that depend on steel and aluminum in an attempt to make the President change his mind. The meeting will probably take place on Thursday.
The Reserve Bank of Australia left its policy rate unchanged at 1.5% , as expected. The RBA downgraded its assessment on future growth. The RBA now expects the Australian economy to “grow faster in 2018 than it did in 2017”. In its previous assessment it assumed growth to be “above 3 percent” over the next couple of years.
Fed Vice Chairman Randal Quarles said U.S. financial agencies are preparing to make “material changes” to the Volcker Rule. “The regulation implementing the Volcker Rule is an example of a complex regulation that is not working well”, he said at a banking conference.
