• During this week, financial markets stepped up expectations of Fed monetary easing (86% probability of a rate cut in July, and 93% probability of two rate cuts in 2019) to quell the negative impact of increasing headwinds (dim prospects of a short-term resolution of China-US trade conflict, and softer inflation and employment data in the US, despite better-than-expected control retail sales). Expectations of monetary easing extended also to the ECB (60% probability of a rate cut in 2019, and 78% in 2020) after the marketbased long-term inflation expectations reached a new low (5y5y forward inflation swap 1.9%) and after dovish comments coming from ECB’s officials.
  • Safe-haven bond oscillated during the week ending flat with no weekly changes, and the US yield curve steepened, suggesting that an insurance cut could help push US inflation higher while aiding growth. Search for yield strategies underpinned peripheral and EM bonds and also supported equity markets.
  • Spain’s risk premium declined to 76bps and Portugal’s narrowed to 87bps. Italy risk premium also dropped though is still elevated (260bps), as the European Commission is likely to start disciplinary action against Italy over its rising debt although the Eurogroup seeks reassurance that Italy will meet fiscal targets.
  • In FX, G-10 currencies were volatile with the US dollar swayed by opposing forces of trade tensions and monetary easing expectations, while the Euro trimmed early appreciation on the back of trade tensions, and some rumors suggesting that the ECB wants to avoid a strong appreciation of the euro, signaling EURUSD 1.20 as a critical level to watch. The increasing probability of a disorderly Brexit also weighed on the EUR and GBP, after the rejection of the bid to block a no-deal Brexit. EM currencies recovered some ground, led by easing funding conditions. The MXN bounced back (+2.6% since last Friday) after the US-Mexico deal that shelved Trump’s tariffs on Mexico with migration reduction measures to be reviewed after 45 days. In addition, PBoC moved to shore up the RMB while the stalemate in US-China trade talks continued. Meanwhile, the TRY depreciated amid ongoing frictions with the US.
  • Oil prices recovered losses accumulated during the week, as two oil tankers were damaged in an attack in the Persian Gulf, which increased concerns about a confrontation between the US and Iran.
  • Markets will be focus on next week Fed monetary policy meeting and the PMI data in the US and Europe.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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