July 21, 2022 11:01 GMT
European government bonds have sold off this morning ahead of the ECB meeting, with Italian BTPs further fueled by the unfolding domestic political crisis. Equities are mixed across the region, as is G10 FX performance.
- Focus on today is the ECB with some speculation in recent days that a 50bp policy rate hike may be in the offing, rather than the 25bp move that the GC had been stipulating. Markets will also be looking for further clarity and specificity on future policy rate adjustments (although we would be surprised if the ECB were to pre-commit again at this stage to specific hikes), and details on a new anti-fragmentation tool.
- Bunds sold off through to mid-morning and then reclaimed losses to now trade just marginally below yesterday's close.
- OATs have slightly underperformed OATs, particularly at the shorter end with the yields up to 2bp higher on the day.
- Italian Prime Minister Mario Draghi has resigned after three of the coalition parties (Five Star Movement, League and Forza Italia) refused to participate in a vote of confidence. Draghi's decision now paves the way for a dissolution of parliament and snap elections, suggesting a protracted period of political instability and economic uncertainty.
- BTPs have sold off sharply with the curve bear flattening. Cash yields are up 2-15bp.
- The shortlist of candidates to succeed UK Prime Minister Boris Johnson has now been whittled down to Rishi Sunak and Foreign Secretary Liz Truss, with the latter drawing on her Thatcherite roots to criticise the high-level of Covid-related spending spearheaded by the former Chancellor of the Exchequer.
- The gilt curve has twist flattened with the 2s30s spread narrowing 3bp.
- Supply this morning came from the UK (Gilt, GBP3.50bn), France (OATs, EUR10.496bn & linkers, EUR1.493bn), Spain (Bonos/Obli, EUR5.061bn)