Markets

Today, the rally in core bond markets continued. Both fundamental and technical considerations were in play. Uncertainty on Italy continues supporting a bid for safe haven German Bunds. However, Italy isn’t the only factor of uncertainty for European investors to worry about. In Spain, PM Rajoy is also at risk of losing the support in Parliament. The centrist party, Ciudadanos, is said to consider a no confidence vote. Spreads on Spanish bonds also widened on this growing political event risk. On the German/safe haven side of the equation, German bunds already had a strong run this week and came close to important technical levels. Those levels (160 area in the Bund contract and 0.47% in German 10-y yield) were broken today, triggering a broader sharp stop loss repositioning of investors being positioned ‘short Bunds’. US yields follow the rally of their German counterparts. A further correction in the oil price eases inflation fears and probably added to the bond-friendly sentiment in the US. This time, the data were not the blame. German Ifo business confidence was close expectations. So, contrary to what was the case for several other EU sentiment indicators of late, the Ifo at least didn’t provide any additional negative surprise. Headline US durable orders missed consensus expectations, but the underlying series (ex transportation and shipments) were good. At the time writing US yields decline up to 5.5 bps, the 5/10y sector outperforming. The rally of German bunds is even more impressive with yields declining between 3.5 bps and 8 bps. The German 10-y dropped below 0.40%. Peripheral yield spreads versus Germany also show an aggressive blow-out. Spanish, Italian Portuguese and Greek 10-year spreads all widen about 17-20 bps.

The tension as mirrored on the European bond markets are also affecting the single currency. EUR/USD yesterday failed to move away from this week lows. The negative headlines from Italy and Spain triggered a new euro selling wave pushing EUR/USD to a new 2018 low. EUR/USD currently trades in the 1.1660 area. That said, the correction in the euro remains orderly, especially taking into account the sharp repositioning on the (intra-)EMU bond markets. At the same time to dollar looks also quite solid. USD/JPY is holding near the recent lows (currently trading in the low 109 area). However, the yen is making little additional progress against the dollar. So, the dollar probably attracts at least part of the safe have flows moving out of Europe ahead of the weekend.

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Today, sterling continued to trade rather weakish. EUR/GBP hovered in the mid 0.87 area. So, the UK currency hardly profited from negative political headlines weighing on the single currency. Yesterday’s comments from BoE government Carney that the BoE could return to a stimulating monetary policy in case of a disorderly Brexit maybe still weighed on the UK currency. The broader USD rally pushed cable back to the 1.3325 area.

News Headlines

In the US, headline durable goods orders disappointed (-1.7% vs. -1.3% expected). However, underlying measures (excluding transportation and shipments) beat consensus thus contributing more to GDP than previously anticipated.

The Spanish Socialist party registered a no-confidence vote against PM Rajoy after his former aides were convicted for corruption but the proposal requires the Ciudadanos party’s backing. The latter also to considers an alternative vote against Rajoy unless he calls for new elections.

The German IFO-sentiment indicator came in close to expectations. The expectations-component (98.5) edged a little lower compared to previous month, while business climate (102.2) and current assessment (106.0) ticked higher.

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