Today, risk sentiment was the major driver for global bond trading as there were few data with market moving potential. German bunds, which outperformed US Treasuries of late, finally met growing selling pressure. Maybe there was some repositioning out of safe haven bunds as the Italian political event risk was out of the way, at least for now. German bunds came under further pressure as the headlines on a potential denuclearization in Korea hit the screens, triggering a broad-based rally of risky assets. In this move German bunds still underperformed US Treasuries. At the time of writing, US yields rose less than 1 bp with the 30 year outperforming (-0.8 bp). The German yield curve is shifting higher between 1.8 bp (2-y) and 4.5 bp (5 & 10y). Intra-EMU 10-y yield spreads versus Germany narrowed across the board with Greece (-11 bp), Portugal (-7 bp) and Italy (-5 bp) outperforming.

Over the previous days political event risk was the dominant factor for global FX trading and this remained the case today. However, the dynamics was different. Since last week, the fear for protectionist action from the Trump administration weighed on the dollar. Today, dollar selling eased as markets hoped that senior members of the Republican party would be able to convince president Trump not to engage in an outright trade war. EUR/USD settled in the mid 1.23 area. USD/JPY drifted back to the 106 area. Around noon, markets were surprised by a positive event risk as South Korean officials declared that North Korea was prepared to talk about denuclearization. Risky assets jumped higher and so did USD/JPY and EUR/JPY. The short-squeeze in EUR/JPY also pushed EUR/USD briefly back above the 1.24 level. For now, the yen decline is easing as markets try to assess the real meaning of the developments on the Korean peninsula. The US trade/tariffs issue also isn’t solved yet. USD/JPY trades currently in the 106.25 area. EUR/USD maintains most of its intraday gains and is changing hands just below 1.24. Interesting, in the risk-on repositioning, interest rate differentials also narrowed in favour of the euro.

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EUR/GBP held a very tight sideways trading range in the 0.8900/0.8930 area. There were plenty of high level meetings between EU and UK politicians preparing a key EU Summit on Brexit later this month. However, for now there were no indications of a breakthrough on any of the key pending issues. Tomorrow, the EU is expected to publish a draft paper including the negotiation position of the EU.

News Headlines

North Korea is willing to hold talks with the United States on denuclearisation and will suspend nuclear tests while those talks are under way, South Korean officials said on Tuesday after a delegation returned from a meeting with North Korean leader Kim Jong Un. The announcement caused a broad-based ‘risk-on’ repositioning on global markets.

France maintains its view that there is little chance of securing a free trade deal that would include financial services the way that Britain hopes it to be. “Financial services cannot be in a free trade agreement … we have to rely on equivalence regimes, that is the best solution for financial services,” le Maire told BBC radio, citing the need for stability and supervision in the sector.

‘It is too early, there risk is too big’ for the Riksbank to raise interest rates now, Riksbank Governor Ingves said in a testimony before Parliament today. The Riksbank governor added that Sweden would have a problem meeting the inflation target if the crown strengthens too fast. The Swedish crown touched a multi-year low against the euro today at EUR/SEK 10.20.


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