In their market wrap, analysts at Westpac argued that Italy’s new government clearly hasn’t calmed all investor nerves, as Italian bond yields surged, including 28 basis points on the 2 year bond and 12bp on the 10 year, back above 3%, noting, however, that there was no sign of this on EUR/USD, which rose to 1.1840 then steadied around 1.1800, up slightly over the day as attention is mostly focused on next week’s ECB meeting.
Key Quotes:
“Tensions remain in selected emerging markets, with Turkey continuing its defence of the lira with a 125bp rate hike to 17.75% and sharp losses on the South African rand, Mexican peso and Brazilian real.
Flight to safety seemed evident too in US treasuries. The 10yr treasury yield drifted up from 2.97% to 2.99% in the London morning, but then plunged during the London afternoon to 2.88%, finally recovering to 2.93%. 2yr yields similarly spiked down from 2.52% to 2.45% before settling at 2.49%. Fed fund futures fell only slightly and continued to predict a rate hike next week and another by year end.
AUD was an underperformer, but its decline was not dramatic, from 0.7655 in the London morning to around 0.7620 late NY. NZD fell from 0.7055 to 0.7025. AUD/NZD lost 0.5% over the day to 1.0850. Defensive yen did well, USD/JPY falling from 110.00 to 109.48 then steadying around 109.70. Sterling absorbed a lot of Brexit news but was flat on the day.
Market impact from European data was minimal. Eurozone’s final Q1 GDP headlines were unrevised at 0.4%qtr, 2.5%yr, though components lifted household consumption at the expense of net trade, govt. spending and investment. German April factory orders (exp. +0.8%m/m) surprised with a -2.5%m/m fall. The fall was even greater for capital goods, -5.6%m/m, and suggests that the weakness in recent survey data is likely to be borne out during Q2.”
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