There is no indication that the uptrend will be reversed

The steps

(European) stock markets have been captured in safe mode yesterday, building on recent fears of the destabilizing effects of rising inflation. European indices lost 1.50% / 2.0%. The liquidation initially coincided with a further rise in yields, with the German 10-year rate and the 10-year swap rate hitting new cycle peaks of -0.07% and 0.21% respectively. Later, financial measures of inflation (and commodity) expectations gradually eased, slowing the rise in yields. The ECB’s warning on financial stability risks added to the idea that the debate on reducing the pace of emergency asset purchases will likely already be alive at the next policy meeting. Rising real yields offset lower inflation expectations. In the end, the slightly bullish German yield curve flattened with yields falling from -0.1 bps (5 years) to 1.7 bps. Yet the uptrend (in yields) remains intact, despite the risk of absence. US stocks also opened with substantial losses, but began a gradual intraday rebound to close with modest losses. the April Fed Meeting Minutes showed that “A number of participants suggested that if the economy continues to make rapid progress towards the committee’s goals, it might be appropriate at some point in future meetings to start discussing a plan to adjust the pace. asset purchases. Headlines in the minutes reinforced intraday trends of higher real yields and easing inflation expectations. Unlike in Europe, this combination triggered another rise in US yields with the belly of the underperforming curve(5-yup 3.9 bp, 10-y + 3.4 bp, 30-y + 0.9 bp). The real 10-year yield jumped 9bp! The dollar initially benefited only very modestly from the reduction in risk, but the surge in US real yields after the minutes eventually helped the US currency out of its recent lows. EUR / USD closed at 1.2175. The DXY index has returned north of 90.00 (close to 90.19). EUR / GBP edged up (close at 0.8625).

Asian stocks are showing a mixed picture this morning, with Japan slightly outperforming. Japanese exports grew by a 38% Y / Y stronger than expected. Imports also increased more than expected (12.8%), suggesting an improvement in international conditions. The dollar is struggling to extend yesterday’s rebound (DXY 90.13, EUR / USD 1.2180).

The ecological calendar is slim today with US jobless claims (expected to drop to 450k) and the Philly Fed’s business outlook likely only matters intraday. In the main bond markets, we will see how Yesterday’s balance between rebounding real yields and easing inflation expectations will develop. At least for European interest rate markets, there is no indication that the uptrend will be reversed as markets anxiously await the ECB meeting on June 10. Yesterday’s rise in US real yields bought the dollar for a while, but we’re not convinced this will mark the start of a prolonged USD rally. On the euro side, the catch-up narrative is apparently still running in the background. The 1.2245 resistance zone remains within reach. A drop below 1.2050 would mean the end of the EUR / USD bullish momentum. It still seems pretty far away.

News headlines

Australian employment fell unexpectedly by 30.6k in April (+20k forecast). The details were slightly more encouraging, with full-time jobs increasing by 33.8k while part-time employment decreasing by 64.4k. The seasonal effects partly explain the disappointment with Easter and the school holidays. The Australian Bureau of Statistics estimated that the impact of the expiry of the temporary wage subsidy stimulus program was minimal. The unemployment rate fell from 5.7% to 5.5%, but probably for the wrong reason, with the participation rate dropping from 66.3% to 66%. Another published data showed Australian consumer inflation expectations fell from 3.2% to 3.5% in May. AUD / USD swept the data, trading near 0.7750 AUD / USD.

US Secretary of State Blinken released a statement on Russia’s Nord Stream 2 pipeline after meeting with Russian FM Lavrov. Although a report by the US State Department concluded that the project was a punishable activity, the US administration decided renounce such action. This demonstrates the government’s commitment to energy security in Europe, in line with President Biden’s commitment to rebuild relations with American allies and partners in Europe.

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