- Rates: Worst case scenario avoided short term, but medium term risks increase
Risk sentiment improved overnight with the US/North Korean Summit back alive and the worst case short term scenario avoided on the Italian political scene. However, snap elections risk strengthening Populist parties’ hands in the medium term. We wouldn’t buy into any BTP relief rally. UK and US markets are closed today, suggesting low volume trading. - Currencies: EUR to enjoy a temporary short-squeeze?
EUR/USD set a new 2018 correction low on Friday as political tensions in Italy and Spain weighed. EUR/USD rebounds this morning as Italian president Mattarella vetoed a euro-skeptic finance Minister. However, for now, we assume that this is nothing more than a technical short-squeeze on a protracted EUR/USD decline since mid-April.
The Sunrise Headlines
- US stock markets ended mixed on Friday with main indices recording small losses (-0.25%) or gains (+0.15%). Asian stock markets gains ground overnight with Japan (flat) underperforming.
- Italy’s leading populist political parties dropped their bid to form a government following a dramatic decision by President Mattarella to block the nomination of an avowedly Eurosceptic FM. New elections (in September?) are likely. (FT)
- Profits earned by Chinese industrial firms in April rose at their fastest pace in six months, as factories benefited from higher prices and strong demand. Profits in April rose 21.9% Y/Y to 576 bn yuan.
- US officials met with their North Korean counterparts following a surprise meeting between the leaders of the two Koreas aimed at reviving a summit between President Trump and North Korean leader Kim Jong Un. (WSJ)
- Moody’s placed Italian’s Baa2 rating on review for possible downgrade. Key drivers are a significant risk of a material weakening in Italy’s fiscal strength and the risk that structural reform efforts stall.
- OPEC and allied oil producers including Russia concluded that the crude market re-balanced in April, when their output cuts achieved a key goal of eliminating the global surplus. Brent crude dropped to $75/barrel. (BB)
- Today’s eco calendar only contains second tier eco data. UK (Spring Bank Holiday) and US (Memorial Day) markets are closed, suggesting low volume trading.
Currencies: EUR To Enjoy A Temporary Short-Squeeze?
Euro gains on Mattarella’s veto, but for how long?
On Friday, European bonds and the euro were captured by a regional risk-off trade. Political uncertainty in Italy was the dominant factor but there was also a growing chance of Spanish PM Rajoy losing support in Parliament. Government bond spreads of Italy and Spain, but also of Greece and Portugal, widened sharply. This European risk off trade also weighed on the euro. Eco data, including German IFO sentiment, were OK, but were no big issue for trading. German yields were hammered and fell below key support levels. EUR/USD dropped from the 1.1730 area to the mid 1.16 area. Still, the euro correction stayed orderly, taking into account the sharp repositioning on EMU bond markets. USD/JPY was hardly affected by the uncertainty on Europe. The pair held a sideways consolidation pattern in the mid-to low 109 area.
During the weekend, politics remained omnipresent. US President Trump changed course again on North Korea and indicated that a US/North Korea summit will probably still take place. In Italy, President Matarella rejected the choice of euro-sceptic Poalo Savona for finance minister. The euro shows some kind of a relief rally. EUR/USD is again trading north of 1.17. Asian equties are mostly trading in positive territory supported by the news on Korea, but USD/JPY hardly profits.
Today, the eco calendar is thin with US and UK markets closed. There are no important data. So the focus will remain on European politics. The single currency this morning shows some kind of a tentative relief rally. However, the question remains open whether the action of President Matarella will ease the anti-EMU feelings in Italy further down the road. After a protracted, almost uninterrupted decline of EUR/USD since mid-April, there is apparently room for a EUR/USD short squeeze. However, for now, there is not that much reason to expect a sustained rebound of the euro and/or a decline of the dollar. EMU political uncertainty is probably here to stay. At the same time, economic sentiment on the US might remain constructive with Friday’s payrolls the next high profile reference for markets to update their assessment on the Fed policy and on the dollar. EUR/USD rebounding north of the 1.1996/1.20 area would call off the ST downward alert. We consider this scenario unlikely in the shortterm.
EUR/USD: Mattarella veto to trigger a temporary euro short squeeze?
