At the end of the last week, markets were uncertain of the impact of expected military action against Syria on global risk sentiment. Airstrikes against the country this weekend didn’t provide a clear signal for markets. There is no indication of an escalation of the conflict. At the same time, geopolitical tension stays highs and might still become a factor of market uncertainty at any time. Asian equities failed to build on a constructive market open. European equity markets showed no clear directional trend. US equities opened in positive territory. The Bund and 10-y Note contract started the week with a cautiously negative bias. The US 2-year yield even set a new cycle top at 2.39%. Fed Kashkari (dovish wing of the Fed) in a WSJ interview supported the Fed rate hike intentions. US eco data (Empire manufacturing and retail sales) were close to expectations. The tentative intraday decline of the 10-y Note future halted after the data. Still, the US yield curve bear steepens with yields rising between 1.8 bp (5-y) and 2.5 bp (30-y). The German yield curve moved in a similar way with yields between 0.2 bp (2-y) and 1.6 bp (30-y) higher. Intra-EMU spread changes versus Germany were mostly little changed to marginally tighter, Greece outperforming (-7bp). Spain hardly profited from Moody’s rating upgrade (-1bp).
The tentative easing of geopolitical tensions after the action against Syria this weekend didn’t help the dollar. USD/JPY soon reversed opening gains and settled in the lower half of the 107 big figure. EUR/USD jumped from the 1.2335 area to the 1.2370 area. CFTC data last week showed that most investors continue to feel comfortable with a substantial US short position even as the dollar enjoys rising interest rate support against most majors, especially against the euro. The US retail sales and the Empire manufacturing survey were not strong enough to change USD fortunes for the better. EUR/USD is drifting higher in the 1.23 big figure (currently 1.2390 area). USD/JPY is going nowhere (107.25/30 area).
At the end of last week, sterling had a strong run. The UK currency tested key resistance against the euro (0.8650 area). The 1.4345 resistance in cable was left intact, but was coming on the horizon. Today, sterling preserved last week’s gains as investors are looking forward to a series of key eco data (including labour market data tomorrow and CPI on Wednesday). This week a next round of EU-UK Brexit negotiations starts. For now, there is no indication that there will be high profile progress. Especially, the issue of the Irish boarder remains an obstacle. However, for now it doesn’t hurt the positive repositioning on sterling. Markets apparently still see a decent/growing chance of a relatively soft Brexit. The test of the EUR/GBP 0.8650 area continues. Later this week, we look out whether the eco data will support the scenario of a BoE rate hike in May and at least a high probability of an additional rate hike later this year.
In an interview with the WSJ, Minneapolis Fed Kashkari indicated that tax cuts and higher fiscal spending made it more likely for the Fed to reach its inflation target in the near future. The Fed governor more or less agrees with the Fed rate hike path as indicated by the dots published after last month’s Fed meeting.
Today, US retail sales were close to expectations. Headline sales rose more than expected at 0.6% M/M, mostly due to strong auto sales. However, core series of the report (including the control group sales (0.4% M/M) which is closely monitored as a pointer for consumption in the GDP report) were close to expectations. Even so, the report doesn’t completely erase the impact of poor sales in previous months.
In a tweet, US President Trump accused Russia and China to play the ‘currency devaluation game’. Remarkably, the tweet was launched only three days after the US Treasury labelled no country as currency manipulator.