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Market Comment | High volatility in debt markets ahead of an eventful week


  • High volatility during the week, in which ECB comments and global trade concerns focused the market’s attention. During the first part of the week European markets recovered some ground after the relative calm in Italy (so far) and the hawkish comments of ECB policymakers. As the week went by and the G-7 meeting drew nearer, the market mood worsened slightly and by today had become markedly cautious. The pressure on emerging markets increased as the US 10Y Treasury again hovered around the 3% threshold and ahead of an eventful week in terms of developed markets’ central bank meetings (Fed and ECB).
  • The ECB policy makers’ remarks boosted European bonds and the euro ahead of next week’s ECB meeting. Recent developments in the eurozone (uncertainty in Italy) cast some doubt on the timing of the ECB’s communication on how it will wind down the QE programme. Nonetheless, this week’s ECB comments, in which it seemed relatively comfortable with the pace of approach to the inflation target and open to discussing the end of QE during next week’s meeting, were read as hawkish by financial markets (see), and increase the probabilities of a change in guidance in June.
  • Against this backdrop the yield on the Bund surpassed the 0.5% threshold during the week and also boosted the EUR, but this movement moderated today as the G-7 meeting increased caution in the markets. In the European periphery Italy remained in the spotlight as the new Italian PM faced a parliament confidence vote (see) after showing great confidence in Italy’s “negotiation power” with the European institutions (see). Italy’s risk premium was highly volatile during the week, and the pressure on the shorter tranches continued, but it seems that contagion to other peripherals (Spain and Portugal) has moderated, so far.
  • US yields continued to rise and the 10Y tenor almost regained the 3% threshold after last week’s sharp drop. The effect of positive payrolls data last Friday and positive confidence data supported this recovery. As in the eurozone, today’s cautious mood ahead of the G-7 meeting moderated the bullish mood on yields. US negotiation with major trading blocs continued after the re-imposition of tariffs on US imports from their main trading partners after two months of exemptions (see).
  • The relative weakness of the USD during the week and the recovery of oil prices in the final part of the week did not give relief to some EM currencies, such as the BRL, which hit its lowest point since 2016 despite the Central Bank’s efforts (see) to halt the pressure on the currency, and the MXN, which apart from the adverse global environment is suffering from the uncertainty about trade with the US after retaliatory measures of Mexican institutions (see). Meanwhile the agreement between Argentina and the IMF (see), with a bigger than expected amount of financial support, seems to have a mild effect on the ARS which continued its depreciating trend.
  • The Turkish lira recovered some ground during the week after the Central Bank (CBRT) hiked the interest rate by 125 bps to 17.75%, clearly above market expectations. With the decision, the CBRT reinforces its stance on inflation worries in the short term and takes a solid step to restore credibility against rapidly worsening inflation expectations (see).
  • The “tightening” process in EM continued as some central banks are reacting actively to the new environment of higher US rates and a strong USD, the latest to take a step in this direction being India, whose Central Bank raised rates for the first time in four years (see).



Update 16:05 CET 08 June

Fuente: BBVA Research



Fuente: BBVA Research

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Fuente: BBVA Research



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