Global core bonds traded with a marginal upward bias today after a hectic week. The eco/event calendar was uneventful. The most important news came from the Italian political scene, where 5SM and Lega presented their government programme. They didn’t mention the anti E(M)U measures which circulated in media earlier this week, but fully draw the fiscal stimulus card. Italian BTP’s underperformed on peripheral bond markets. The Italian 10-yr yield spread added 11 bps with again spill-over effect to other peripheral bonds markets (Greece: +10 bps, Portugal +7 bps, Spain +6 bps). German yield drop by 1.6 bps (30-yr) to 2.8 bps (5-yr) at the time of writing. US yields shift 1.2 bps to 2.5 bps lower. In both cases, the belly of the curve outperforms the wings. The US 10-yr and 30-yr yields remain above key resistance levels for now, respectively at 3.07% and 3.22%.
Global markets reacted rather calm to the agreement of the 5SM and the Lega to form a new anti-establishment government in Italy. Italian assets (bonds and equities) underperformed. EUR/USD declined back below the 1.18 level after the announcement. Investors probably turned a bit more cautious on the euro as it is unclear what the exact consequences will be of the policy of the new Italian government. At the same time, underlying USD strength was also still at work. There were no important data in the US. However, sentiment turned slightly more risk off this afternoon. In the current environment, this supports the dollar more than the euro. EUR/USD is setting new 2018 lows. The pair currently trades just north of 1.1750. Interest rate differentials between the euro and the dollar narrowed marginally today, but this didn’t affect the USD positive momentum. USD/JPY remains also well bid even as risk sentiment is turning less buoyant. The pair trades currently just below the 111 handle. So, USD strength remains the name of the game. Uncertainty on Italy was a slight additional negative for the euro.
There was very little to tell on sterling trading today. EUR/GBP held a tight range close to, but mostly slightly below 0.8750. There were no UK eco data and we didn’t see any high profile ‘new’ news on Brexit (customs union debate). The intraday price action tentatively followed the intraday price pattern of EUR/USD. Cable dropped back below 1.35 on USD strength. The 1.3451 correction low is coming close.
Italy’s anti-establishment Five Star Movement and the far-right League struck a deal to bring a populist government on a platform of fiscal expansion, an aggressive crackdown on immigration and a shift towards Russia in foreign policy (FT).
China denied that it had offered a package to slash the US trade deficit by up to $200 bn, hours after it dropped an anti-dumping probe into US sorghum imports in a conciliatory gesture as top negotiators meet in Washington. (Reuters).
Cleveland Fed Mester said that “monetary policy should be on the table” to defend financial stability if macroprudential tools fail to contain stability risks. (BB)
Belgium’s consumer confidence index declined for a 2nd consecutive month in May, dropping to 11-month low of zero from 2 in April, as the outlook for the labor market and the economy deteriorates further, according to emailed statement from National Bank of Belgium.