Tensions on core bond markets eased today following a hectic trading week. 5SM and Lega officials confirmed ahead the opening bell that a debt write-off and/or leaving the euro are not part the government’s plans. It’s sufficient to stop the rod on the BTP market for now, but not enough to put the genie back in the bottle. The US Note future stabilized near yesterday’s sell-off low with the US 10-yr yield still above the key 3.07% level. US eco data remain very strong with jobless claims hovering near historically low levels and the Philly Fed Business Outlook confirming that US Q2 GDP growth will be strong after a blip in Q1. Today, it wasn’t sufficient to add another downleg in the US Note future. Higher oil prices, with Brent crude above $80/barrel, also failed to do the trick. The German yield curve bear steepens at the time of writing with yields 0.6 bps (2-yr) to 2.4 bps (30-yr) higher. 10-yr yield spread changes versus Germany range between -2 bps (Portugal) and +1 bp (Italy) with Greece underperforming (+7 bps. The US yield curve steepens with yield changes varying between -1.2 bps (2-yr) and +0.9 bps (30-yr).
FX trading faced quite some diffuse signals. On the euro side of the story, the 5SM and Lega parties in Italy are still finalizing negotiations to form a new government. Comments from the negotiating parties indicated that the aim for a €250 bln write-down on ECB debt is no longer on the table. Other topics that might potentially unnerve the EU (and markets) will remain in the government agreement. This is still a euro negative. EUR/USD dropped again below the 1.18 mark late in the European morning session. At the same time, US yields are holding at/near cycle peaks. In this respect, the Philly Fed business outlook printed much stronger than expected. For now, the report didn’t widen the interest rate differential between the dollar and the euro. EUR/USD hovers in the 1.18 area. USD/JPY outperforms USD/EUR, trending higher in the 110 big figure (currently 110.75). To summarize: the dollar remains well bid, but the decline in EUR/USD slows as US/EMU interest rate differentials don’t widen any further for now. Euro investors also await the specifics of the Italian government deal.
There were no UK eco data today, but there was again plenty of Brexit noise. Sterling rallied overnight on press reports that Britain was considering to stay in the EU customs union beyond the transition period. This option could also provide a backstop in case no Brexit deal would be reached in time. EUR/GBP dropped to the 0.8715/20 area at the start of European dealings this morning. However, at the EU summit in Sofia, UK PM May repeated that the UK still intends to leave the EU and the customs union. The sterling rally stalled and EUR/GBP settled in a sideways range in the 0.8715/55 area. Cable is holding in the 1.35 area (within reach of recent lows) as the dollar continues to enjoy support from high US yields.
Strong demand and supply cuts led by the OPEC and Russia are fuelling the oil prices’ rally. Brent crude traded temporary above $80 p/b, the highest level since late 2014. WTI Crude, currently near $72, is also trading at a multiyear high.
The Philadelphia Fed Business Outlook came in much stronger (34.4) than expected (21.0). The indicator confirms a strong manufacturing sentiment across the US as the Empire Manufacturing in NY also surprised markets on Tuesday.
PM May’s inner cabinet has agreed on a plan to keep the UK aligned with the EU’s tariff rules for longer, according press rumors. The arrangement is said to be designed to potentially provide more time after the UK’s full departure from the EU/ transition period in 2021 and to break the stalemate on the issue of the Irish border.