Fading Geopolitical Risk Hits Dollar as Markets Focus on Rate Differentials — Market Talk

0811 GMT - Markets are taking a decisively optimistic stance over the U.S.-Iran conflict despite renewed tensions, which is weighing on the dollar, ING's Francesco Pesole says in a note. Investors seem to be clinging on to the fact that technical talks continue, he says. Fading geopolitical risk means continued focus on rate differentials. These have moved against the dollar in some instances, for example where markets have increased bets on another interest-rate rise by the European Central Bank, he says. The recovery in risk sentiment has also prompted a decent rebound in high-yielding emerging market currencies, he says. The DXY dollar index falls 0.1% to 100.799. ([email protected])0735 GMT - A potential takeover of Commerzbank by UniCredit could lead to a worsening of UniCredit's credit metrics, CreditSights analysts say in a note. Such a move could lead to UniCredit's common equity tier 1 (CET1) ratio falling from 14.2% to a pro-forma level of 11.4%, the analysts say. UniCredit's profitability indicators are also expected to deteriorate, the analysts say. ([email protected])0731 GMT - Recent military strikes between the U.S. and Iran have boosted expectations for another interest-rate rise by the European Central Bank but the euro has limited scope to benefit, ING's Francesco Pesole says in a note. The re-escalation has prompted a re-tightening in euro-dollar short-term swap differentials. "While all this is injecting new confidence into previously dwindling expectations for a September ECB hike, the path for euro-dollar to come out stronger from this re-escalation is quite narrow." The euro could stabilize versus the dollar Friday as markets wait for more clarity on the situation but there is a risk of it falling back below $1.14, he says. The euro rises 0.1% to $1.1438.([email protected])0726 GMT - Yields on U.K. government bonds, or gilt, fall as investor concerns ease due to U.S. and Iran continuing talks to end the Middle East conflict. Investors are optimistic given that the two waring parties continue to negotiate, ING's Francesco Pesole says in a note. A U.S. official said technical talks with Iran are continuing despite recent strikes between the two sides, The Wall Street Journal reports. Ten-year gilt yields fall 2.7 basis points to last trade at 4.879%, Tradeweb data show. ([email protected])0723 GMT - Sterling rises to a new one-year high against the euro and remains stronger versus the dollar after reaching a near four-week high earlier in Asian trade. Bank of England's chief economist Huw Pill told BBC's Walescast programme Thursday that interest rates will need to rise in response to inflationary pressures. A recent easing in fiscal concerns also continue to support sterling along with reduced fears over a return to a full-blown conflict in the Iran war. The Wall Street Journal reported that technical talks between the two sides continue despite recent strikes. The euro falls 0.1% to as low as 0.8515 pounds, extending its recent losing streak. Sterling reached as high as $1.3451 earlier and last trades up 0.1% at $1.3425. ([email protected])0706 GMT - Bitcoin rises on improved risk sentiment following an easing of worries over U.S.-Iran tensions. A U.S. official said technical talks with Iran are continuing despite recent strikes between the two sides, The Wall Street Journal reports. Trump and Israeli Prime Minister Benjamin Netanyahu also spoke on Thursday agreeing to continue co-ordination between the two countries, according to the Israeli prime minister's office. Sentiment was already turning more positive late Wednesday after Trump said Iran was desperate for a deal, Deutsche Bank analysts say in a note. Bitcoin rises 0.9% to $63,873, LSEG data show. ([email protected])0653 GMT - Eurozone government bond yields decline in early trading, benefiting from a rally in Japanese government bonds as well as lower oil prices as concerns about Middle East tensions ease slightly. Japanese bond yields fell after Finance Minister Katayama said the government will encourage pension funds to invest more in local financial assets, helping to reverse recent increases in yields. Government bond issuance will come from Italy, while France and Spain will announce details of their respective auctions for next Thursday. The 10-year Bund yield falls 2.2 basis points to 3.035%. Declines in other 10-year eurozone government bond yields are of similar magnitude, according to Tradeweb. ([email protected])0637 GMT - The dollar falls as concerns about a return to full-blown conflict in the Iran war fade, sending oil prices lower and driving investors away from safe-haven assets. A U.S. official said technical talks with Iran are continuing despite recent exchanges of military strikes between the two sides, The Wall Street Journal reports. "Our view remains that we should get a deal near term, but we see it as a fudge rather than an agreement which can ensure long-lasting peace," Jefferies economist Mohit Kumar says in a note. The DXY dollar index falls 0.2% to 100.751. ([email protected])0600 GMT - German Bunds have shifted from being relatively rich just over a week ago to relatively cheap now, Citi's Jamie Searle says in a note. Nonetheless, German Bunds "are still in the range," and Citi therefore sticks with its assessment for a 2.85%-3.10% range for 10-year Bund yields, the rates strategist says. "On that basis, we suspect that the sharp selloff may stall around current levels," he says. The 10-year German Bund yield closed at 3.052% on Thursday, according to LSEG. ([email protected])0552 GMT - U.S. Treasury yields and market pricing the probability of Federal Reserve tightening remain elevated relative to pre-Iran War levels, even though crude oil prices have unwound most of the initial increases after the war began, say Eurizon SLJ Capital's Stephen Jen and Joana Freire in a note. "However, the market seems to have the view that U.S. bond yields could be permanently higher, reflecting inflation and other worries," they say. Risks to U.S. yields are biased to the downside, and so are those for the dollar, according to them. "We believe the Fed has not completed its easing cycle and ultimately will need to move the FFR [fed funds rate] to neutral," they say, anticipating that the Fed's next move is still a cut. ([email protected])0538 GMT - U.S. Treasury yields trade stable in Asia, as investors come to terms with a renewed bout of tensions between the U.S. and Iran after President Trump's announcement earlier this week that the ceasefire between the two countries was over. "Yields pulled back as markets looked past the recent rounds of U.S.-Iran attacks and Brent crude declined below $77 per barrel," Danske Bank analyst August Hyldgaard says in a note. The two-year Treasury yield trades at 4.165%, while the 10-year Treasury yield is at 4.540%, according to Tradeweb. ([email protected])0529 GMT - Investors have become increasingly concerned that the Federal Reserve's next policy decision will be a quarter percentage-point hike, coming as early as this month, but this is unlikely to happen, says Phil Orlando at Federated Hermes. "We disagree, expecting the Fed will look through the energy supply shock, which should be temporary, and keep rates unchanged," the chief market strategist writes in a note. Last week's disappointing U.S. labor-market data prompted markets to push out their expectations for an eventual rate hike to later this year. Money markets price in a 22% probability of a 25-basis-point rate increase in July, according to LSEG. ([email protected])