US: Decline In US Global Reputation Could Impact US Business Interests

Tuesday saw further weakness across European bonds, despite seemingly FI-benign data releases.

• Following Monday's sell-off following a de-escalation of the US-China trade war, European core FI remained on the back foot as a risk-on tone persisted in equities.
• Brisk supply on both the corporate and sovereign (Netherlands, Germany, Italy, EU) fronts in Europe weighed on the space.
• The Gilt front-end/belly outperformed, with the latest labour market report bringing a downside surprise on the wage front (and little in market-moving commentary by BOE's Pill). And in the most closely-watched release of the day globally, US CPI came in softer than expected.
• In the end, the data didn't hold sway, with cross-asset moves in a lower USD and higher equities after the US CPI release instead dragging Bunds and Gilts to/near session lows by the cash close.
• The German and UK curves both bear steepened, with the UK belly/short end outperforming overall as noted.
• Spreads tightened modestly on the EGB periphery/semi-core, with BTPs leading gains.
• Wednesday's calendar includes some final April HICP readings, while we also get multiple ECB speakers including Villeroy and Holzmann.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2.3bps at 1.936%, 5-Yr is up 2.3bps at 2.245%, 10-Yr is up 3.2bps at 2.68%, and 30-Yr is up 4.5bps at 3.126%.
• UK: The 2-Yr yield is down 2bps at 3.98%, 5-Yr is up 0.5bps at 4.131%, 10-Yr is up 2.7bps at 4.67%, and 30-Yr is up 3.6bps at 5.427%.
• Italian BTP spread down 1.1bps at 101.8bps / Spanish down 0.7bps at 61.9bps  

• RES 4: 1.1625 1.500 proj of the Feb 28 - Mar 18 - 27 price swing
• RES 3: 1.1608 High Nov 9 2021
• RES 2: 1.1440/1573 High Apr 23 / 21 and the bull trigger
• RES 1: 1.1256/1381 20-day EMA / High May 2 - 6  
• PRICE: 1.1173 @ 16:47 BST May 13
• SUP 1: 1.1082/65 50-day EMA and a pivot level / Low May 12 
• SUP 2: 1.1026 38.2% retracement of the Feb 3 - Apr 21 bull cycle 
• SUP 3: 1.0943 Low Apr 10    
• SUP 4: 1.0857 50.0% retracement of the Feb 3 - Apr 21 bull cycle

EURUSD maintains a softer tone and the pair traded sharply lower Monday. Recent weakness appears corrective and key trend signals remain bullish. However, the pair has breached the 20-day EMA and pierced 1.1082, the 50-day EMA. A clean break of the average would strengthen a bear threat. A key resistance to watch is 1.1381, the May 2 - 6 high. Clearance of this level would signal the end of the correction. 

Tuesday's Europe rates/bond options flow included: 

• ERN5 98.18/98.37/98.50 broken c fly, sold at 3 in 3k
• ERU5 98.50/98.75cs, bought for 1 in 7k
• ERU5 97.87/98.00cs, sold at 9.5 in 10k
• ERU5 98.37/98.50/98.62c fly, bought for 1 and 1.25 in 8k
• ERZ5 98.37/98.50cs, bought for 2.5 in 17.5k (ref 98.18, 8% del)
• SFIZ5 96.40/96.80 call spread vs. 96.00 puts paper paid 2 on 5K, buying the call spread