European markets experienced a risk-on movement today, following a record close of the US S&P 500 above the 5500 mark. This positive sentiment also influenced European investors, with the Eurostoxx 50 gaining 1.3%. In addition, risk premia on French and intra-EMU bond markets narrowed slightly. The French 10-year spread over Bunds decreased to 68 bps, down from 74 bps two days ago and 82 bps last week. This shift was attributed to the ‘Republican Front’ of the left-wing Nouveau Front Populair and President Macron’s Ensemble withdrawing candidates to join forces, reducing the chances of Rassemblement National securing an absolute majority.
Despite the risk-on sentiment, European interest rate markets saw only modest directional impacts. German Bund yields fluctuated between +2.5 bps (2-year) and -3 bps (30-year) before the release of the US services ISM data. On the other hand, US markets faced some data challenges ahead of the national holiday, with the ADP private labor market report showing a slight softness in job growth.
At the ECB symposium, NY Fed Williams discussed the concept of a higher neutral rate post-pandemic, highlighting the uncertainty surrounding the R-star decline. Meanwhile, the US services ISM unexpectedly fell into contraction territory, indicating potential challenges ahead.
In the FX market, major cross rates remained within established ranges. The Euro benefited from the European risk-on sentiment and softer US data, leading to an extension of its rebound against the dollar. The yen continued its decline against a weaker dollar, reaching its lowest level since December 1986.
In other news, the Swedish services PMI rebounded in June, showing growth after two months of contraction. This positive development, along with other indicators, supports the Riksbank’s policy guidance of potential rate cuts. Additionally, Reuters reported that several ECB policymakers are advocating for a review of the aggressive monetary stimulus policies employed by the ECB over the past decade.
Overall, the financial markets are experiencing various shifts and developments, influenced by both domestic and international factors. Traders and investors should closely monitor these trends to make informed decisions in the ever-changing market environment.