EU CREDIT SUPPLY: Monte dei Paschi €500m WNG 10.25NC5.25 Tier 2 - Books

The USD holds lower vs. most of its G10 peers, with U.S. President Trump’s delay to 50% tariffs on the EU (deadline kicked back to July 9) weighing on the greenback. Only the safe haven JPY & CHF are lower vs. the USD on the day.

• The USD continues to suffer from policy uncertainty, which, when coupled with stagflationary survey data and a gradually slowing labour market, is eroding some of the U.S. economic exceptionalism that the USD has benefitted from.
• This has outweighed any hight for longer pricing surrounding the Fed in recent weeks, with comments from Minneapolis Fed President Kashkari underscoring the need for the central bank to remain on hold for “a while2 over the weekend.
• EUR/USD extended the recent bullish move, trading as high as 1.1419 before fading back to 1.1380. Next resistance of note seen at the 76.4% retracement of the Apr 21 - May 12 bear leg (1.1453).
• GBP/USD tops out at 1.3593 before a pullback to 1.3560. The 1.382 projection of the Feb 28 - Apr 3 - 7 price swing (1.3605) presents the next upside area of note.
• USD/JPY has recovered from the lowest levels registered in May (142.23 printed in Tokyo trade), with the wider risk reaction to the delay of the tariffs on the EU providing some counter. Spot last deals at 142.96, with bears remaining in technical control. A move through today’s lows would expose the 76.4% retracement of the Apr 22 - May 12 bull leg (141.96). Bulls need to retake the 20-day EMA (144.66) to start turning the tide in their favour.
• Risk proxy FX (AUD, NZD, NOK & SEK) outperform on the U.S.-EU tariff relief.
• Comments from ECB’s Lagarde & Nagel are due today but will focus on a mix of trade and a fragmented world, so may not shed too much light on direct monetary policy matters.
• There isn’t much on the G20 data calendar today.
• Holidays in the UK & U.S. will thin out wider market liquidity.

EURNOK has fallen over 6% from the April 11 multi-year highs at 12.2223, and a lower close today (currently -0.15%) would be the seventh consecutive losing session. However, some sell-side names think recent krone strength has run its course, and look for EURNOK to reverse higher in the coming months: 

• Danske Bank: “We recommend buying EUR/NOK spot @ 11.4820 as a tactical trade with a strategic potential. We set a soft target of 11.8500 and a hard stop-loss of 11.2500”.
  • “The gap to our short-term financial model has now been closed, which in isolation suggests that there is no longer a short-term gravitational force pulling the NOK in a stronger direction when evaluated against moves in commodity prices, interest rates and equity sectors/regions”
  • “We think a lot of positivism has been priced into markets, which leaves NOK FX vulnerable to setbacks – even more so with technical indicators reaching borderline stretched oversold territory”
  • “As we see the balance of risk skewed towards tighter NOK rates spreads, we also expect diminishing support to the NOK from relative rates”.
• Nordea: “We now believe that the downside to EURNOK is somewhat more limited, and we see EURNOK at 11.75 by summer”
  • “We expect higher interest rates and lower values of US government bonds. Norwegian life and pension companies have currency-hedged most of their government bond holdings, which involves selling the NOK when bond values fall to maintain their hedging ratios”.
  • “Distrust towards the US will lead to more investors moving their savings from the US to other countries…Along with a broad focus on defence across Europe, it could attract much international capital and support the EUR in the coming years…Ramped-up defence spending may also trigger larger capital flows to Sweden, which has a broader defence industry, than to Norway”. 

Goldman Sachs write “the recovery in risk sentiment coupled with policy puts on both the monetary and fiscal side continue to create a favourable environment for European sovereign credit. Even a risk wobble on tariff and trade risks saw marginal widening in sovereign credit spreads, which outperformed their equity beta”.

• Goldman continue “to estimate that sovereign spreads are slightly tight to fundamentals, but the same dynamics that are likely to keep the EUR front-end steep also imply that growth upside should prevent material widening”.
• They note that “French political risk remains an ongoing uncertainty, although we do not expect this to worsen tangibly on a short-term horizon. Unless we see increasing pressure from opposition parties for fresh elections, sovereign spreads will likely remain tight given the current favourable macro backdrop”.
• Zooming out, Goldman note that “relative to our year-end targets, Bonos are the least stretched and, given the strongest fiscal fundamentals there, we continue to expect vol-adjusted outperformance in Bonos vs BTPs and OATs.
• Overall, they “prefer sovereign credit to gain duration exposure in Europe, given the more symmetric distribution for terminal rate pricing”.