Today, global sentiment turned further risk-off. A growing number of issues caused investors to take profit on the recent rally in equities/risky assets. Over the previous days, Italy had become a growing source of investor concern. Uncertainty persists whether a new 5SM/Lega government will be installed and what program it will try to execute. Geopolitics also returned on the radar as US president Trump sounded less positive on the China trade negotiations and on his meeting with North-Korean leader Kim Jong Un. The currency crisis in Turkey also continues. Last but not least, the EMU May PMI’s disappointed again. The EMU composite index declined further to 54.1 from 55.1. French and German data also missed the consensus. This mix was a good reason for investors to look for shelter in safe haven core bonds. German yields (except for the 2-y) declined up to 5.5 bp (10-y). The 10-y yield nears the key 0.47/0.50 support area. Intra EMU spreads versus Germany widened further with Italy (+16 bp) again hit the hardest. Portugal (8 bp), Greece (7 bp) and Spain (7 bp) also suffered substantial additional losses. US yields showed tentative signs of a ST topping out process of late. Today, US bonds joined the global safe haven rally with yields declining up to 4 bp, the belly of the curve outperforming. The US 10-y yield again neared the 3.0% barrier. Later today, the 5-year US Treasury auction and the Minutes from the May Fed meeting are worth to keep an eye on.
The risk-off trade combined with disappointing EMU eco data also left its traces on the major FX cross rates. The yen outperformed. The euro suffered. Poor EMU PMI ‘s pushed EUR/USD for an extensive test of the 1.17 area. The pair finally dropped (temporary?) below this big figure this afternoon. The yen, which was under pressure (against the dollar) since end March, made quite an impressive U-turn. USD/JPY already filled bids below the 110 barrier (to be compared with a ST top of 111.40 reached on Monday). Even more striking, EUR/JPY fell below the key 129 support area (cf. graph infra). If confirmed, this might be a ST warning signal for global sentiment on Europe and on the single currency.
Early this morning, sterling slightly underperformed the dollar but outperformed the euro. Poor EMU PMI’s weighed on the single currency. EUR/GBP dropped temporary to the 0.8740/50 area. Mid-morning, the UK CPI also missed the consensus with headline CPI printing at 2.4% Y/Y. The core measure dropped even further from 2.3% Y/Y to 2.1%, close to the BoE inflation target. UK CBI retail data were stronger than expected, but were not able to change fortunes for sterling. Interest rate markets further reduced expectations for an August BoE rate hike. EUR/GBP rebounded to the high 0.87 area. Cable was hit quite hard. The pair dropped to the low 1.33 area. For now, sterling fails to outperform the beleaguered euro.
The Italian candidate for the premiership Giuseppe Conte has been summoned by the Italian president Mattarella for talks this evening. However, the meeting is no guarantee the president would immediately hand Conte a mandate to become Italy’s next prime minister.
European PMI’s disappointed today. The indicators slipped whereas markets were expecting some stabilization after a 3-month drop. The EMU composite PMI declined from 55.1 to 54.1. The marked expected an unchanged reading at 55.1. Similar measures in Germany and France also missed the consensus by a big margin
In a tweet, US president Trump expressed doubts about the US and Chinese trade talks, saying a trade agreement in its current form probably is “too hard to get done”.