Analysts at Westpac offered a market wrap, noting that risk appetite was mostly cooler in London/NY, with Italy under pressure again and US yields lower despite firm data. EUR bounced however on a hawkish ECB story.
Key Quotes:
“Italy’s anointed PM Conte’s maiden parliamentary speech presented the 5 Star/League coalition policies prior to confidence votes to affirm the new coalition. Policies were broadly as per the initial coalition contract and Conte’s strong delivery highlighted their desire for EU changes. But former PM Monti said he couldn’t rule out Italy needing assistance from the IMF, European Commission and ECB. Italian equities closed -1.2% and the 10 year Italian bond yield jumped 27 basis points to 2.76%.
This left EUR/USD under pressure, down half a cent to under 1.1660, when it was revived by a Bloomberg story citing anonymous Eurozone officials claiming that at next week’s policy meeting, the ECB could discuss the timetable to end its bond purchase program. There is a wide range of views at the ECB so no guarantee that this is a representative opinion, but it was enough to spark a EUR rally to 1.1730. Sterling also rose despite various gloomy headlines on Brexit negotiations.
AUD/USD fell from 0.7650 early London to 0.7595 early NY before trimming losses to around 0.7615. This meant AUD was the weakest G10 currency on the day, after being the strongest on Monday. With Australian GDP data looking strong, AUD’s underperformance is a little surprising, despite the return of jitters over Italy. NZD fell from 0.7045 to 0.6998 before pushing back to 0.7025, about flat over the day. AUD/NZD fell from 1.0875 to 1.0830/40.
USD/JPY was weighed by European nerves and lower US treasury yields, falling from 110.00 in Tokyo to 109.47, then grinding back to 109.80. CAD seemed unsettled by lower oil prices and suggestions by US officials that NAFTA could be scrapped in favour of bilateral deals. USD/CAD spiked to 1.3067 before slipping back under 1.3000.
The US 10yr treasury yield fell from 2.94% to 2.90% then to 2.92%, while 2yr yields fell 2bp to 2.49%. Fed fund futures continued to predict a rate hike on 13 June and another by year end though yields were slightly lower on the day.
This fall in yields came despite yet more data confirming US growth revved up strongly in Q2: service sector PMIs resoundingly strong while job openings hit record highs. The May service sector ISM rebounded to 58.6 from 56.8 last month, just below 13-year highs of 59.9 in January. Production, new orders and employment, already at lofty levels, crept higher still. US job openings in the Job Openings and Labor Turnover Survey rose to a record high 6.7mn in April.
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