Sunset Market Commentary | Action Forex

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Markets

Markets ‘enjoyed’ some kind of interregnum between high profile data releases scheduled yesterday (US ISM, EMU inflation) and later this week (ADP, US non-manufacturing ISM, payrolls). Near expectations EMU PPI’s (7.6% Y/Y) and a big miss in German April retail sales understandably had no meaningful role to play. Markets developed their own internal dynamic. At least for now, investors apparently are not overly worried by the recent mix of strong activity data being complicated by supply/labour bottlenecks annex rising prices. In this respect, broader commodity indices are again turning north, with Brent oil holding near $71 p/b. For core bond markets this still translates in a pattern of real yields being capped by high/rising inflation expectations. In this respect, we keep a close eye at this evening’s Fed Beige Book. Usually, this anecdotical narrative on regional eco and price developments is only a side-story for trading. However, at this juncture, more evidence of supply and labour disruptions accelerating prices might not pass unnoticed, not for individual Fed governors nor for markets. For now it still all calm on US bond markets. Yields are declining up to 1.5 bp across the curve. German bonds slightly outperform with the curve flattening. 10-30 y yields decline 2 bp. Overall low volatility also helps stabilizing intra EMU government bond spread levels off recent ST ‘peak’ levels. Moves in equities are again limited, but low volatility gives this asset class the benefit of the doubt. Both US and European indices are only a whisker away from all-time/cyclical top levels.

On the FX market, the dollar is in rather good shape given the relative calm on other markets. The jury is still out but at least for now, technical support levels for the US currency aren’t challenged. The trade-weighted index (DXY) tries to hold north of 90 (90.03). In a similar narrative, the EUR/USD 1.2243/66 area proves to be a hard nut to crack. EUR/USD is changing hands near 1.22. A break below 1.2133 could signal a further scaling back of USD-shorts. A rejected test of the 1.4237 February top in cable yesterday triggered broader sterling profit taking even as (some) BOE members recently turn a bit less complacent on the temporary nature of inflation. Sterling regained its composure today. Cable stabilized (1.4160 area) despite a broader USD-bid. EUR/GBP reversed most of yesterday intraday rebound, returning to the low 0.86 area. In Turkey, CBRT governor Kavcioglu tried to give some comfort for lira investors after yesterday’s call for lower interest rate from president Erdogan. In an investor presentation, the CBRT governor advocated that fears of a premature rate cut are not justified and that the Bank intends to keep the policy rate above expected inflation. The Iira intraday ‘rebounded’ from historic low levels against the euro and the dollar this morning. EUR/TRY again trades in the 10.50 area.

News Headlines

The European Commission’s Vice President Dombrovskis  said that based on their spring forecast, the general escape clause will stay activated in 2022 but no longer in 2023. That means EU states have another 18 months to borrow and spend without having to abide by the 3%-deficit and 60% debt-to-GDP rules. Under the spring forecasts, all EU economies are expected to have returned to their pre-coronavirus levels by the end of next year. In the meantime, governments are advised to maintain supportive economic measures, Dombrovskis added.

US money market funds’ assets swelled above $4tn for the first time last week as ever more cash flows into the system, the Financial Times reported, keeping short-term rates under constant downward pressure. A triple whammy from QE, stimulus cheques and Treasury shrinking the stock of short-term bills in circulation in some cases pushed rates even below 0%. Recently, the effective Fed Funds rate shed another tick to 0.05%, a level many analysts say could prompt the Fed to action.

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