Euro gives banks a shot in the arm

Summary

European yields are giving global banks a shot in the arm that’s strong enough to lift stock markets, but not so potent as to raise inflation fears.

Euro holds gains

The euro was hovering close to Thursday’s latest two-week highs as repricing of Europe’s inflation outlook continued. A slightly weaker FTSE 100 was a first possible sign that resurgent currencies could drag risk-seeking markets, but a slide by Vodafone on dividend payments accounted for much FTSE slippage. U.S. stock index futures were green and European stock markets mostly firm. Banks were the dominant gainers as 10-year bund yields inched to fresh two-week highs, pointing to improved lending rates.

Italian reality check

Italy’s FTSE MIB was another stock market exception after the Bank of Italy’s liabilities to other eurozone central banks rose about €38.5bn to a new record high of $464.65bn; unfortunate timing given political uncertainties. The news erased an earlier 1% stock market gain, and rekindled Italian benchmark yield elevation to 2.94%, back in the top half of a seismic range that peaked near 3.3% before easing to 2.53% on Monday. The move confirmed Italy’s markets remain watchful, more so after the statistics office also warned of moderating growth on Thursday. Italian stock and bond markets are increasingly unlikely to close to their performance gap with the rest of Europe anytime soon.

Euro avoids pullback ahead of G6-plus

Italian political developments and chart-technical patterns are main risks to the euro’s rebound with the squeeze of significant short interest beginning to run its course. Traders will be mindful of the extent to which the well-trailed end to ECB bond buying was already priced in and how much of the euro’s 8.4% February to late-May slump was due to slowing growth. Deteriorating conditions for the dollar may delay the euro’s consolidation. All signs point to an acrimonious showdown at the upcoming ‘G6-plus 1’ summit. President Trump’s chief economic advisor says he’s sticking to his guns on recently imposed tariffs, prompting the EU to press ahead with a retaliation on €2.8bn of U.S. imports. Detriment will be mutual if measures are sustained and escalate, but for the short term, revived monetary sentiment in Europe gives the euro the upper hand. A tightening EU/US 10-year spread, and seasonal factors also offer euro headroom. EUR/USD’s next major chart challenge is the swing high of $1.996 on 14^th May. Another close above the prior day’s high as per Wednesday, for a fourth-straight gain will set the course definitively with daily momentum oscillators neutral.

Sterling focus returns to Brexit vote

For the pound, renewed talk of an indefinite ‘backstop’ plan on the Irish border, and consequently a customs union, were evidently not negative for sentiment. Sterling against the dollar inched closer to a challenge of $1.348s, the launchpad for the pound’s acceleration to early 2018 post-referendum highs of $1.43. $1.348 has latterly posed resistance. As Downing Street inevitably moves into deeper cabinet and parliamentary discord ahead of next week’s debate and vote, optics for the pound may deteriorate. Much will depend on how PM May fares in attempts to outmanoeuvre rebels and convince Brussels. Both are formidable tasks with unpredictable outcomes ahead of the 12^th June vote on Brexit Bill amendments.

More central bank-speak wanted

Enhanced anticipation ahead of next week’s ECB meeting and statements will have market participants hanging on the words of almost any central bank official in the run up, though no senior ECB policymakers are on Thursday’s slate. BoE MPC member Dave Ramsden delivers his second speech of the day at 5pm. He’s expected to shy away from rates talk. President Trump’s meeting with Japan’s PM Shinzo Abe is worth watching for potential trade related headlines, despite their cordial relationship. Japan is on its third month of U.S. tariffs.