Markets
Global core bonds gained ground today as risk-sentiment deteriorated overnight. US equity markets closed yesterday’s session with gains but disappointing after-market Q3 results from important tech companies (Amazon, Alphabet (Google)) alarmed investors. Safe haven flows were in play with US Treasuries continuing the upward move from yesterday’s close. European bonds followed the move north as Asian and European equities join the risk-off trade today. Markets stabilized at noon, awaiting US Q3 GDP results. UST’s lost some ground ahead of the announcement. The US growth slowed less than expected in Q3, with the economy expanding 3.5% in Q3, coming from a 4.2% in Q2, beating market consensus of 3.3%. Treasuries eased temporarily, to pair some of the intraday gains but the move didn’t last. At the time of writing, UST’s resumed their upward trend. German Bunds behaved in a similar way but with a smaller magnitude. The German yield curve shifted down with changes between -1.9 bps (2-yr) and -4.3 bps (10-yr). The US yield curve bull steepened with moves ranging from -2.3 bps (30-yr) to -4.4 bps (2-yr). Intra-EMU peripheral bond spreads initially widened, but sentiment improved later in the session.
A few US tech giants reported disappointing earnings/guidance yesterday evening. It was enough for yesterday’s equity rebound to reverse into a new risk-off selling wave. Asian equities were sold and several EM currencies came again under pressure. Of late, the dollar didn’t always profit from a risk-off environment. However, this time, the dollar (ex USD/JPY) was again the preferred save haven destination. Major FX cross rates were captured by classic safe risk-off dynamics with EUR/USD, EUR/JPY and USD/JPY all trending south during the European morning session. Investors were looking out whether US markets would extend this risk-off trade. Or would the US Q3 GPD release ease investor fears on growth? EUR/USD changed hands in the 1.1340/45 area before the publication of the release. US Q3 GDP release was solid, but close to expectations. The risk-off trade eased a bit after the publication of the US growth report. EUR/USD and USD/JPY regained a few ticks, but the FX reaction is very limited after all. US equities open with substantial losses, but futures are off the intraday lows. The jury is still out whether the risk-off trade will ease going into the weekend. EUR/USD is trading in the 1.1350 area. The key 1.1301 support stays within reach. USD/JPY tries to sustain/regain the 112 big figure.
Sterling stayed in the defensive today. The UK currency touched a multi-week low against the dollar (below 1.28). EUR/GBP also maintained yesterday’s gain as investors are worried on the inability of the UK government/ conservative party to agree on an unequivocal and workable Brexit approach. The global risk-off context also doesn’t help sterling. EUR/GBP trades currently around 0.8865. Cable hovers near 1.28.
News Headlines
The US economy expanded a solid 3.5% Q/Qa in the third quarter, according to the first estimate released by the US Commerce department today. The figure was close to market expectations. Growth was again mainly driven by personal consumption (4.0% Q/Q). A build-up of inventories also supported overall growth (2.07% growth contribution). Net exports were a drag on Q3 growth (negative growth contribution of 1.78%). Part of the negative trade impact was due to frontloading of soya exports at the end of Q2 as exporters tried to avoid trade tariffs in China, imposed from early July.
The Russian central bank (CBT) left its key interest rate stable at 7.5% after an unexpected 25bp raise in September. The bank said the market situation had stabilized but is wary of the external risks (i.e. US sanctions). The CBT nevertheless hinted at future (December?) hikes to counter rising inflation. USD/RUB gains a few ticks (65.9) today, but that is largely due to a stronger USD.
