FxWirePro: Risk sentiment simmer on array of bad news hitting the market

Risk sentiment is still on and yen remains well bid despite the global stock markets holding their breath for the past three trading days. Several fundamental developments over the past week or so, have soured market sentiment.

• Political uncertainties and developments in Europe - Pro-European Parties have secured two-thirds of the 751 members strong parliament, but the surge of nationalists parties have increased the risk of clashes between and Brussels and National governments. After the election, the European Commission announced that Italy would be charged €4 billion penalties should it breach the EU debt limit as the Nationalist government plan to increase the deficit to boost domestic demand. In France, President Macron’s ‘En Marche’ came second to nationalist Marine Le Penn’s ‘Rally Nationale’. Though nationalists ultimately lost the day, they won important battles in Italy, Hungary, France, Germany, and in the United Kingdom, where Brexiteer Nigel Farage’s Brexit Party won the majority of the seats.
   
• The biggest drivers of risk sentiment are from China, where People’s Bank of China has warned against yuan shorts amid trade war with the United States, showing the concerns over the latest yuan move, where the Chinese currency has depreciated 4 percent against the USD. All signals pointing to the steady deterioration in trade talks. Things are likely to get worse before it gets better. Another key driver of risks has been the first default in the Chinese banking sector - China’s banking and insurance regulator and central bank took control of the Baoshang bank due to the credit risk it poses. Baoshang is a small bank with $83 billion in assets compared to big Chinese banks with trillions in assets, but such a default shows the fragility in the banking sector after years of fast-paced lending to companies and projects. 
   
• China is witnessing a record pace of corporate defaults, amounting to 39.2 billion yuan of domestic bond defaults in the first four months of the year.
   
• Political uncertainties continue in the UK and Prime Minister Theresa May announced resignation effective June 7th.

However, U.S. treasuries are pointing to declining risk aversion sentiment as 10-year yields declined to 2.27 percent, the lowest level since last October.