Yesterday the major theme seemed to be dollar weakness, which we associate with a more risk-loving environment returning. The Beige Book report on economic activity saw the US economy expanding at a modest-to-moderate pace through to the end of March. Manufacturers were worried about rising oil prices, but warm weather had boosted retail sales. Given concerns about a double-dip recession in the eurozone and UK, the fact that the US economy continued to expand in the first quarter should have been dollar positive, instead the greenback slipped against the pound rising from $1.59 to $1.5940 in early trading. Euro-dollar rallied from $1.31 to $1.3140 before giving back some of those gains.
10-year Spanish bond yields have continued to retrace earlier rises. Having peaked at 6.02% yesterday morning, yields eased as ECB Governing Council Member Benoit Coeure suggested that the ECB might restart its Securities and Markets Programme (SMP) and purchase Spanish bonds as interest rates were at inappropriate levels. Attention is now paid to this morning’s Italian debt auction where the government is looking to raise up to €5 billion in debt maturing in 2015, 2020 and 2023. Yesterday, the Italian government saw borrowing costs on one-year notes double from the 1.4% it paid in March to 2.84%. That said, the government did borrow €11 billion in total from markets and against the background of an uncovered German Bund auction
Eurozone data today is unlikely to be helpful. The market is looking for a 0.2% fall in industrial production which could prove a little pessimistic after 0.3% rises in Germany and France. Asmussen and Praet are due to speak today explaining how the ECB is supporting the sovereign bond market and also on de-leveraging in Europe. The former speech will be of more interest in light of Coeure’s comments yesterday. Signs that the SMP will be re-started would help push down peripheral bond yields.
We look for the UK trade deficit to continue to narrow due largely to rising exports to non-EU countries. Recent survey data have highlighted UK success in tapping South East Asian, African and Latin American markets.
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