RECAP

The European equities advance was led by banks which rose 1.8%, as they were bolstered by solid earnings from HSBC. The Auto sector saw some sharp gains after the Chinese regulator proposed cutting the car purchase tax by half according to people familiar with the matter.

This led to an increase in Daimler, Volkswagen, and BMW where they rallied approximately 5%, lifting DAX to session highs. The Italian FTSE MIB outperformed its European peers with the banking sector rallying approximately 3.5% after Friday where S&P kept ratings unchanged for the Italian Banks.

Optimism spreads, with all of the European Stoxx sectors in the green, and core bond yields were higher and peripheral, semi-core and swaps spread all tightening up. Bunds extended their losses in high volumes, with Gilts and U.S. Treasuries following. The Bund/BTP spread tightened about 15bp although the BTPs have come off best levels.

The EUR pared initial its losses on reports that Merkel wants to stay in her role as Chancellor despite not running for CDU Party Head. The Swiss Franc and Japanese Yen were among the worst performers in the Group-of-10 currencies, as havens were shunned.

WTI crude continued its overnight move to the downside, steadying just above $67. Base metals saw small losses.

In the key headlines for the European session:

  • Merkel prepared to not run for CDU Party Head but wants to stay German Chancellor: DPA
  • Friedrich Merz ready to run for CDU Head Position: Bild
  • Italy budget deal could use ‘standby’ on some items: Messaggero
  • Italy Premier Conte has asked Govt entities to prepare options to help banks if spread worsens: Corriere
  • K. Hammond: may need a new budget and austerity measures without a Brexit deal
  • Fed’s Bostic says Fed must be wary of U.S. economy overheating
  • Reuters: BoJ considering tweaks to bond-buying operations

OUTLOOK

The European session saw a big increase in optimism as the equity market seem to embrace the new-found positiveness allowing to rise back up into the ranks of consolidation and helping to lessen the negativity that has shrouded the market for some time now. This will most probably translate into the U.S. market as the U.S. session prepares to get underway.

The Economic Calendar for this session will focus on the U.S. PCE price index. This is the go-to indicator of the FOMC when measuring the inflation of the country. According to them, this indicator gives much cleaner and clearer picture than that of the CPI or Core CPI for that matter. That is not to say that those are not important, but the FOMC focuses on the PCE more than it does on the other two. Keeping an eye out for the release later on today will help investors gauge the tendency on rate hikes.

TRADERS VIEW

The euro fell to a fresh session low after a brief recovery in early London trading following a report that German Chancellor Angela Merkel won’t run for a new term as head of the Christian Democratic party. The euro was already on the back foot after her fragile coalition took a beating at a state election. European stock markets were still advancing, and peripheral bonds rallied. The dollar advanced and Treasuries were choppy while Brazilian markets were set to advance after Jair Bolsonaro swept to power in the presidential election Sunday.

EUR/USD – EUR/USD climbed 0.2 percent to 1.1416 after having fallen as much as 0.4 percent earlier.

GBP/USD – GBP/USD climbed 0.2 percent to 1.2848 while gilts dipped ahead of U.K. Chancellor of the Exchequer Philip Hammond’s annual budget Monday.

USD/JPY – USD/JPY climbed 0.3% to 112.21, while AUD/USD gained 0.1% to 0.7097, advancing for a third day.

EUR/GBP – EUR/GBP held a three-day advance and was little changed at 88.88.

USD/MXN – USD/MXN jumped 2% to 19.7478 as the decision to scrap the airport-building project raised concern about Mexico’s environment for doing business.