Markets
Risk premia were back in vogue from the start of trading this morning. Evidently, the stalemate in the process of reaching a solution to the US-Iran conflict, via higher oil prices (Brent currently $107.5 p/b), again tilted markets to a more risk-averse approach. However, country-specific issues obviously are also at work. UK markets were the main case in point. Since last week’s huge defeat of Keir Starmer’s Labour party in regional and local elections, (internal) pressure within his party is building for the PM to resign. However, the PM after a Cabinet meeting today reiterated he intends to continue governing at least as no formal leadership contest is being triggered along the party rules. Even so, from a market point of view, whether the UK PM stays in place and adapts policy or whether he finally quits, fiscal policy/sustainability might again be at risk if policy were to shift to a more pro-spending course. UK yields in nervous trading add 9 bps (2-y) to 12 bps (10-y). After holding ‘remarkably’ stable in a first reaction to the election outcome, sterling this time also lost ground. EUR/GBP just missed a test of the 0.87 barrier (currently 0.8675). On Japanese markets, some tensions are also lingering. Yields on Japanese government bonds add between 1 bp (2-y) and 4.8 bps (30-y). This might not look that spectacular. However at 2.56% the Japanese 10-y yield is touching levels last seen in 1997. At 3.83%, the 30-y JGB yield is also closing in on last year’s multiyear top. Higher Japanese risk premia also suggest fiscal sustainability issues. Admittedly, a good 10-y bond auction to some extent mitigated pressure. Even so, FX policy also plays on the background. US Treasury secretary Bessent and Japan Fin Min Katayama indicated to stay in close contact to address undesirable FX volatility. This suggests the US supports Japan’s FX interventions to prevent further yen weakness. However, at some point, it also might put additional pressure on the BOJ to take ‘more fundamental’ action (rate hikes) to provide yield support to the ailing currency. This remains a factor of uncertainty for Japanese yield markets too. The yen intraday briefly spiked from the 157.7 area to near 156.8, but can’t hold on to the gains (currently 157.6). In current context of higher risk/inflation premia, German bond yields add between 6 bps (2-y) and 4.5 bps (30-y). The Eurostoxx 50 cedes about 1%.
With the market focus mainly on risk premia outside the US, April US CPI inflation also deserved attention. At 0.6% M/M and 3.8% Y/Y for headline (from 3.3%) and 0.4% M/M and 2.8% (from 2.6%) for the core reading, the report was slightly higher than expected. Evidently, the rise in energy/gasoline prices were responsible for the rise in prices. However, the move was more broad-based with amongst others food prices (0.5% M/M) and broader services prices ex energy (0.5% M/M, including shelter 0.6% M/M) adding to price rises. With recent labour and other US activity data holding up well, today’s data justify the call of those FOMC members objecting the easing bias in the statement. Even so, the reaction on US yield markets 2-y +3 bps; 30-y +2 bps) remains modest. US equity indices are correcting 0.5%-0.75% lower.
News & Views
The Belgian debt agency launched a new 5-yr benchmark (OLO 108 3.1% Aug2031) via syndication. The bond was priced to yield MS + 19 bps compared to guidance in the MS +21 bps area. Books were in excess of €45bn, allowing the debt agency to print €8bn. Thanks to today’s sale, the BDA now raised €32bn in OLO funding YtD compared with a €51.6bn target (62%). The remainder is expected to be collected through regular OLO auctions given that today’s deal was this year’s third and final (according to funding plan) syndication. In January the BDA launched its traditional new 10-yr OLO benchmark (3.4% Jun2036). In February, they launched a 30-yr OLO (4.35% Jun2056).
CME Group, the world’s leading derivatives marketplace, and Silicon Data, the industry leader in GPU market intelligence and benchmarking, announced they will launch a first-in-class compute futures market later this year, pending regulatory review. The new futures contracts will allow traders, financial institutions, AI builders and cloud-service providers to manage volatility and price risk associated with the multi-trillion-dollar compute market. The products will be based on Silicon Data’s indices, the world’s first daily GPU benchmarks for on-demand rental rates. The CEO of global trading firm DRW, which backs the initiative argues that compute will become the largest commodity in the world. “The exponential growth in spending on data centers as we move towards that reality has been hampered by the lack of a hedging vehicle. The launch of a compute futures market is an important solution to that problem that can help market participants manage price volatility and plan with greater certainty.”
