Analysts at Westpac explained that European equities fell despite an apparent agreement to form a government in Italy and noted that the US allowed the waiver on metals tariffs to expire for most importers, sparking strong retaliatory measures from the EU and Canada. 

Key Quotes:

“Italy looks a lot closer to gaining a functioning coalition government now that an alternative finance minister in Giovanni Tria has been found, but the proposed Cabinet still has anti-Euro Savona as minister for European Affairs. The 5 Star/League proposals should be presented to President Mattarella later today and, if accepted, go to both houses for ratification confidence votes over the following week.

Italian 10 year bond yields dropped 9bp and Portugal’s by 7bp as concerns eased. EUR/USD rallied as high as 1.1724 but spent most of NY trade under 1.1700. Spanish PM Rajoy seems likely to lose a vote of no confidence on Friday. GBP/USD also rallied in the London morning before unwinding to no net change on the day, at 1.3290.

USD/JPY ranged sideways between 108.40 and 109.00, flat on the day. AUD also ranged sideways between 0.7555 and 0.7593. NZD rose slightly, probing above 0.7000. AUD/NZD slipped from 1.0850 to 1.0795, perhaps indicating the AUD’s greater sensitivity to global trade news, as the EU and Canada pledged to retaliate against the US steel and aluminium tariffs. Australia remains exempt.

Data had limited impact. Eurozone’s May CPI rose more than forecast but in line with recent national releases: core 1.1%y/y (f/c 1.0%) and the headline 1.9% (f/c 1.6%) was lifted by fuel costs. Eurozone April unemployment at 8.5% highlights that labour slack remains in the region.

The Fed’s preferred inflation measure, the PCE deflator, rose 0.2%mth in Apr, on both overall and the core measure, leaving annual inflation at 2.0% and 1.8% respectively.

The US 10yr treasury yield ranged from 2.82% to 2.88% but was net unchanged on the day at 2.85%. Two-year yields ranged sideways between 2.40% and 2.44%. Fed fund futures were steady, continuing to predict two hikes by year-end.”

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