Bond markets had a volatile ride today. The Italian-related risk-off trade initially continued and even accelerated. The Italian yield curve bear flattened. The 2-yr yield rose from 1% in the opening to 2.5% around European noon. The Italian 10-yr yield rose from 2.7% to 3.2% over the same time span with a peak at 3.4%. The German Bund continued to be safe haven with the German 10-yr yield at one stage 18 bps lower (!) and testing 0.18% support. The panic move suggests final repositioning to latest developments and could be technically labelled as an exhaustion move. We will now probably enter the campaign phase with opposition parties saying that Lega-5SM want a euro-exit and Lega-5SM saying they were denied their democratic right of governing. Recent polls suggest growing support for especially Lega (27% from 17% in March) while 5SM currently remains the biggest party (29.5% from 32.5%). The Italian 2-yr and 10-yr yields respectively returned to 2.3% and 3% at the time of writing. The German 10-yr yield is back near opening levels around 0.33%. Daily changes on the German yield curve range between -2.3 bps (2-yr) and +1.3 bps (30-yr). The decline in US yields is larger, catching up after yesterday’s Memorial Day Holiday. They vary between -2.8 bps (2-yr) and -5.5 bps (5-yr). 10-yr yield spread changes vs Germany widen 37 bps for Italy, 40 bps for Greece, 14 bps for Portugal, 10 bps for Spain and 5 bps for Ireland.
Today, the price action on global markets and in FX trading in particular was quite similar to yesterday. Markets were in some kind of wait-and-see mode in Asia. However, any uptick in Italian related (risky) assets initially was still considered an opportunity to offload this kind of risk. Italian equities declined and BTP’s fell off a cliff. More than was the case earlier this week, the move spilled over to other asset classes including the euro. Interest rate differentials between the US and Germany weren’t that much of a good guide for EUR/USD trading as Treasuries had still some catching up repositioning to do after yesterday’s US holiday. However, the combined blow-out of Italian government bond spreads and at the same time a new sharp decline in the 10-y German yield was a clear pointer of ongoing investor panic. EUR/USD tumbled from the 1.1640 area at the start of European dealings to fill bid in the 1.1510 area just before noon. From there, some easing in the ‘Sell-Italy’ trade kicked in. EUR/USD found a new short-term balance in the mid 1.15 area. So the 1.1554 MT support was broken intraday. EUR/USD (currently again 1.1580) tries to close above this barrier. Despite the risk-off sentiment, the gain of the yen (against the dollar) remained modest. USD/JPY spiked lower during the morning session but rebounded to the 109 area.
There was again little in the way of UK specific news today. The focus for sterling was also on the developing economic story in Italy. As was the case yesterday, EUR/GBP more or less followed the intraday trading dynamics of the headline EUR/USD currency pair. However, the intraday range stayed modest given the wild swings on other markets. EUR/GBP dropped temporary to the 0.87 area, but reversed about half of the intraday loss later in the session. (Currently 0.8720 area.) The EUR/GBP cross remains within the established technical barriers. For now sterling is still no preferred beneficiary of the Italian/EMU tensions.
The governor of the Bank of Italy has warned that the country was “a few short steps away” from losing the “asset of trust”, a rare intervention by the central bank into a political crisis that underlined the risk Rome faces as it stumbles to new elections. (FT)
German wages rose by 2.5% on average Y/Y in the first quarter, data showed, a sharp rise on late 2017 that supports expectations that consumers will remain a key driver of growth in Europe’s largest economy. (Reuters)