Markets
Global core bonds trade near opening levels as markets calmed down as the past days’ concerns proved somewhat exaggerated. Risk aversion initially persisted though this morning, with Asian equity markets losing ground apart from China. High-ranked Chinese officials pledged support for the stock market, causing some backwind for local markets. Global core bonds first edged higher with German Bunds outperforming US Treasuries. Italian BTP’s moved south, pushing Italian yields near multi-year record highs. The EC officially expressed its concerns over the Italian budget proposal. Calm returned to markets before noon. However, Italy for the first time really dragged Spain and the semi-core lower as well. Not surprisingly, Spanish and Belgian bonds underperform others as both countries are also pushing for higher deficits. An Italian-like stand-off with Europe most probably won’t occur. The Spanish 10-yr yield spread (+3 bps) matches the end of May high (136 bps). The Italian spread widens over 330 bps. Daily changes on the German yield curve vary between -0.1 bp (5-yr) and -2.0 bps (30-yr). The US yield curve moves north, but remains close to unchanged. Moves range from +0.36 bps (5-yr) to +1.1 bp (30-yr).
Political noise on the Italian budget, a global risk-off and a generous interest rate differential in favour of the dollar weighed on the EUR/USD cross rate yesterday. With no important eco data on the agenda, question was whether this trade would continue. EUR/USD stabilized this morning as the action of the PBOC put a floor for Asian markets. However, in Europe, doubts persisted. Intra-EMU spreads still widened a few bp, European equities failed to maintain modest opening gains. EUR/USD also tried a new downside test and came close to the 1.1432 support. However, the move lacked conviction. In lackluster trading, EUR/USD returned to opening levels. The political risks linked to the Italian budget are still at work, but at current levels (both in intra-EMU spreads and in the euro), quite some bad news is apparently already discounted. At the same time, there was also no news to support further USD-gains today. EUR/USD trades in the 1.1465 area, near opening levels. USD/JPY succeeded some cautious gains in Asia this morning and hovers currently in the 112.50 area.
Sterling developed a similar erratic-like trading pattern today, as was mostly the case earlier this week. There were again plenty of quotes from policy makers of both sides on Brexit. Amongst others EU’s Barrier said that a Brexit deal was 90% done. EUR/GBP declined a few ticks this morning. However sterling investors still want confirmation on the remaining 10% before engaging in additional sterling long positions. UK September budget data were again better than expected but also failed to support sterling. Cable held a very tight sideways range in the lower half of the 1.30 big figure. In line with EUR/USD, EUR/GBP reversed a small earlier dip. The pair trades again in the 0.88 area.
News Headlines
Canadian eco data disappointed. Headline August retail sales declined by 0.1% M/M with core sales down 0.4% on a monthly basis. Consensus expected a modest increase for both. September headline inflation unexpectedly fell back from 2.8% Y/Y to 2.2% Y/Y (vs 2.7% Y/Y expected). Core CPI slowed from 2% Y/Y to 1.9% Y/Y. The loonie lost ground with USD/CAD spiking north of 1.31.
Portuguese media reported that Secretary of State for Finance Ricardo Mourinho Felix hinted at repaying €2bn of the €4-4.5bn outstanding IMF loans later this year.
The UK’s budget deficit was smaller than expected in September, dropping to £4.12bn from £4.96bn one year ago. For the first half of the financial year, the deficit reached £19.9bn, down 35% from last year, the lowest at this stage since 2002.
