The Big Bond Sell-Off

Risk sentiment turned negative yesterday following a contraction in manufacturing activity across the Eurozone. Additionally, persistent speculation that the Netherlands may lose its “AAA” credit rating, coupled with worrying political developments in France, has shifted market attention to today’s Dutch, Italian and Spanish bond auctions. Beyond Europe consumer confidence, new home sales and Richmond Fed manufacturing activity data in the US due today are keenly awaited. Markets seem to have set their eyes on the Fed’s two day policy meeting starting today. At home, data just out indicates that public sector net borrowing climbed for March, setting the stage for tomorrow’s crucial GDP numbers.

Pound Sterling – UK Markets

Yesterday, the Pound posted decent gains against the Euro and hit the highest level since August 2010, amid mounting political uncertainty in Europe and weak manufacturing data emanating from the region. However, Sterling is only holding steady against both the Euro and the US Dollar this morning. Data just out indicates that public sector net borrowing rose more than expected for March. The previous week’s upbeat data across varied spheres including housing, labour and the retail market has spurred cautious optimism among investors, which has been further supported by the BoE minutes indicating dimming prospects of further easing. Markets expect this overall buoyancy in the economy to reflect in tomorrow’s crucial GDP data, which is likely to show that the economy grew 0.1% sequentially in the first quarter, thus avoiding a technical recession. With Nationwide house prices being the only economic indicator on tap today, the Pound is expected to be largely driven by sentiment towards the Eurozone.

US Dollar – US Markets

The US Dollar moved higher against the majors yesterday as weak manufacturing data from Europe and China rattled markets. Moreover, the looming uncertainty over the Eurozone’s political scenario spurred demand for safe haven currencies. In today’s trading session, the US Dollar gave up some of yesterday’s gains against the Euro and is trading marginally lower, following an improvement in French consumer confidence for April. Among key economic releases today, US consumer confidence and Richmond Fed manufacturing index are expected to be largely negative. New home sales and S&P/Case-Shiller home price index will also be tracked for insights into any meaningful improvement in the housing market, following last month’s dismal scenario. Apart from these, the Federal Reserve’s post policy meeting press conference, scheduled tomorrow, and the first quarter GDP numbers slated later this week are likely to be decisive for movement in the US Dollar against the majors.

Euro – European Markets

Weak manufacturing PMI data from major Eurozone nations dragged the Euro lower against the majors in yesterday’s trading session. Additionally, the Bank of Spain spooked markets after it indicated that the nation’s economy slipped into a recession in the first quarter of 2012. The fragile political situation in the Netherlands and France has further weighed on the Euro. Following a breakdown in budget negotiations Dutch Prime Minister, Mark Rutte, tendered his cabinet's resignation. This has raised fears of a new round of elections in the Netherlands and has threatened the nation’s “AAA” credit rating. However, the Euro has trimmed some of Monday’s losses against the US Dollar after data revealed an unexpected improvement in French consumer confidence for April. Underpinning the positive sentiment, the ECB Governing Council Member, Christian Noyer, affirmed that steps taken to exit the crisis are beginning to bear fruit. Market participants are expected to closely track Italian, Spanish and Dutch bond auctions scheduled later today, to gauge the impact of recent political events on the region’s borrowing costs.

Other Currencies – Highlights

The Swiss Franc has advanced against the US Dollar after data released earlier today revealed that the nation’s consumption indicator rose to a reading of 1.22 for March, compared to a reading of 0.90 recorded in the previous month. However, gains were capped and the Swiss Franc continued to hover close to the 1.20 mark against the Euro after the nation’s trade surplus unexpectedly narrowed for March, on the back of declining exports. The weak trade balance data has stoked concerns that the SNB may intervene in the currency markets to weaken the Swiss Franc. Meanwhile, the newly appointed SNB President, Thomas Jordan, last week reiterated his commitment to maintain a cap on the value of the Swiss Franc.