Sunset Market Commentary

Markets

There’s nothing to break the deadlock for now. Last week’s correction higher in US Treasuries and lower in USD following the Fed-payrolls combo isn’t met by real follow-up action this week. A very light eco calendar supports the current standstill. Lower volatility and last week’s bond correction prove fertile breathing ground for stock markets. Main European indices build on yesterday’s 1%+ gains on Wall Street. Israeli forces taking control of the Rafah border-crossing don’t spoil sentiment. Central bank comments are so far limited to ECB de Cos who confirmed that the ECB is readying a June rate cut without committing to a further path for rates in H2 2024. ECB Nagel and Fed Kashkari will still hit the wires later today and could together with the US Treasury’s $58bn 3-yr Note auction be a welcome decoy on this otherwise dull session. Daily changes on the US yield curve currently range between -0.7 bps (2-yr) and -3.4 bps (30-yr). German yields record similar losses with the long end also outperforming. EUR/USD holds an extremely narrow range between 1.0760 and 1.0780.

UK Gilts outperform as London returns from May Day holiday festivities. UK Gilt yields slide 4 bps (2-yr) to 8 bps (10-yr) in the run-up to Thursday’s BoE policy meeting. Recent MPC comments suggest that the board is split between following the ECB’s lead with a rapid first policy rate cut (eg Bailey, Ramsden, Dhingra) or the Fed’s example by sticking with peak interest rates for somewhat longer (eg Pill, Mann, Haskel). The new Monetary Policy Report will help navigating the decision. We see asymmetric market risks if the “ECB-pack” gets its way given current market pricing of a first policy rate cut in August or September. The BoE may lay the groundwork for a June move given the window of opportunity created by the accelerating disinflation process in coming months. Simultaneously such action would help the UK economy out of its precarious situation with no growth recorded in Q2 of last year followed by a technical recession in H2 2023. Such outcome would send EUR/GBP sustainably above 0.86 with resistance kicking in at EUR/GBP 0.8786.

News & Views

The OECD, IMF and WTO are forecasting a sharp rebound in global trade this year. After just 1% growth in 2023, trade in goods and services should recover to 2.3% this year and go down the same path in 2025 (3.3%). OECD chief economist Lombardelli attributed the uptick to a cyclical recovery after high inflation, surging interest rates and sluggish demand weighed on trade growth last year. China and east Asia together with a booming US economy were singled out as key drivers of trade activity. Expansions in China and the US, for example, helped annual goods trade growth rise to 1.2% in the second month of the year (latest available data), up from a 0.9% contraction in January. Despite the green shoots, global trade still falls short of the 4.2% average rate (IMF calculations) between 2006 and 2015.

Spanish central bank governor de Cos said his institution will likely upgrade its 1.9% growth forecast in the upcoming update in June. It only recently (March) upped the full-year forecast from the 1.6% previously expected. The southern economy is among the European top performers with the services sector (in particular tourism) providing strong impetus to activity. De Cos added that a strong labour market and the stabilization of geopolitical tensions supported this trend. GDP in the first quarter of the year expanded by 0.7% quarter on quarter, crushing estimates for an already solid 0.4%.