Deal or no deal

Hopes for a US-Iran peace agreement triggered a rally in European bonds and stocks yesterday (US and UK markets were both closed for a public holiday), but reports of US strikes on Iran overnight is muddying the waters regarding a deal and is souring the mood in markets a little this morning as oil prices move up off  yesterday’s lows. In FX, the dollar is largely holding its own, supported by a recent rise in relative US bond yields. EURUSD and GBPUSD are both essentially unchanged from yesterday morning’s levels, trading at around $1.1630 and $1.3470 respectively, while EURGBP is  marginally firmer at £0.8635.

ECB rate expectations eased as the market moved back to pricing in just over 50bps of hikes for the remainder of this year, with a circa 90% chance of a 25bps increase at next month’s monetary policy meeting (June 11th). German bonds rallied strongly, led by the front end of the curve, with 2-year yields falling by around 12bps and 10- and 30-year yields around 8-9bps lower on the day. European stocks also rallied strongly, gaining around 2%, though they are opening a touch softer this morning (off around 0.3%).

ECB Governing Council member Schnabel says the central bank should hike interest rates in June. She says that, “given the size and the persistence of the current (energy price) shock, looking through is no longer an option in my view (hence) I think a rate hike in June will be needed.” She also adds that “even if the ​war ended today, a lot of damage has already been done to energy infrastructure and global supply chains, so even then, ​I believe that a monetary policy reaction would be needed.”

For the day ahead, economic data scheduled for release include the Conference Board’s consumer confidence indicator for May, house prices (March) and the ADP weekly employment report in the US, and the CBI’s latest retail sales survey (May) in the UK.