Markets:

Core bonds traded mixed today. The German Bund gained ground while the US Note future more or less flat-lined. Bunds profit from European safe haven flows. Italian media reported that 5SM & Lega, who are on the brink of a coalition deal, discussed a €250bn debt forgiveness plan. More specifically, they eye government debt held by the ECB under its asset purchase programme. Both parties in a joint statement denied that this was the latest version of the proposal, but the news suggests that they might hold on to some of their more radical ideas apart from favouring huge fiscal stimulus. The news sent a shiver through the BTP market. Italian yields rose by 15 bps to 10 bps, bear flattening the Italian yield curve. The Italian 10-yr yield spreads adds 16 bps. There’s some spill-over effect to other peripherals with the Greek spread 26 bps higher and the Spanish/Portuguese one 7 bps. German Chancellor Markel unfortunately (?) added fuel to the fire while calling for structural reforms because the ECB’s ultra-easy monetary policy won’t last forever. German yields decline by 2.2 bps (2-yr) to 4.6 bps (5-yr & 10-yr) at the time of writing. The US yield curve flattens with yield changes varying between +0.2 bps (2-yr) and -1.5 bps (30-yr). US yields remain below key resistance levels (3.07% 10yr & 3.22% 30yr) despite strong April industrial production data and comments by Atlanta Fed Bostic who’s gradually shifting from being in favour of 2-3 rate hikes this year to 3-4.

After a pause late last week and on Monday, EUR/USD resume its downtrend. The move was mainly due to broad-based USD strength, supported by higher US yields. The 1.1820/25 support area came within reach. This morning, the rise of the dollar/decline of the euro looked like taking a breather. However, the calm didn’t last long. Mid-morning, EUR/USD tumbled lower again. The move was triggered by press headlines on some unconventional measures that might be part of the program of a 5SM/Lega government in Italy. The coalition parties downplayed the headlines, but couldn’t restore market confidence. The impact on markets outside Italy remains modest. However Italian equities and BTP’s underperformed and there was some fall-out on the single currency. EUR/USD dropped below the 1.18 big figure. The USD/JPY rally also ran into resistance contrary to the buoyant performance of late. Investor caution restored the balance between the dollar and the safe haven yen. USD/JPY is drifting back to the low 110 area. US eco data (housing starts, permits and production) were close to expectations with limited impact on USD.

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There were no important eco data in the UK today. Sterling trading was mostly technical in nature. The UK currency strengthened against the euro as the single currency suffered from political uncertainty on the program of a populist Italian government. The decline of EUR/USD also dragged EUR/GBP lower. EUR/GBP further reversed the post-BoE rise. The pair trades in the 0.8740 area. Cable (high 1.34 area) is holding near recent lows as uncertainty on Brexit and relative USD strength are weighing on this cross rate. The UK government promised to publish a detailed plan next month on the nature of their relationship with the EU post-Brexit. There is an important EU summit on June 28.

News Headlines:

The Turkish lira reversed a drop to a record low (EUR/TRY 5.2 from 5.3) after the central bank said it was monitoring markets and would take necessary steps, a sign policy makers are getting closer to action to stem a rout. (BB)

The Polish central bank kept its interest rate unchanged at 1.5%, as expected. Central bank governor Glapinski and two other MPC members will holds a press conference at 4pm CET.

UK PM May has announced plans to publish a Brexit white paper ahead of a key European Council meeting next month, setting out for the first time in detail what Britain is seeking from its future relationship with the EU. (FT)

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