Markets
Global core bonds edged marginally lower today in a day clearly characterized by low volume trading ahead of the US midterm elections of tonight. German Bunds outperformed US Treasuries at opening but paired those gains throughout the day. European Commissioner Moscovici repeated a hard stance against Italy’s budget proposal and Italy’s PMI’s (final) printing lower than the first reading pushed BTP futures lower. European equities opened in red as well. This climate of risk aversion pushed the Bund higher. As there is no important economic data to steer trading today, investors remain on the sidelines awaiting the US midterm elections. A split Congress, where the Democrats take back control of the House and the Republicans holding on to their majority in the Senate remains the most likely scenario. First results will start to seep in tomorrow morning 5am. Final results are expected at Wednesday noon. Core bonds are currently trading near opening levels. The US yield curve moved little with changes ranging between -0.4 bps (30-yr) and +0.5 bps (5-yr). German yields edge less than 1 bp higher across the curve. Peripheral bond spreads widen with Italy (+8 bps) and Greece (+5 bps) underperforming.
Investors acted in some kind of no man’s land today. There were few eco data. EMU PMI’s were upwardly revised, but with little impact on the euro. Substantial political event risk was looming as the US is voting for Congress. Uncertainty on the outcome and on the consequences of the most likely outcome (a different majority in the House and the Senate) caused an attitude of overall investor caution. European stocks drifted slightly lower. US equities overcame initial weakness. Markets perhaps see less risks of an overheating US economy as president Trump faces more headwinds to implement aggressive fiscal stimulus in a split Congress. Whatever the interpretation, global sentiment was mixed and the dollar lost a few ticks in erratic trading. EUR/USD is rebounding in the 1.13/1.16 ST consolidation pattern, currently trading in the 1.1430 area. The yen recently profited only very modestly from an overall risk-off context. USD/JPY declined from the mid 113 area to the 113.15 area earlier today, but rebounds in line with US equity futures. The pair trades again in the 113.30 area
Sterling profited over the previous days from headlines/rumours that the UK and the EU were making substantial progress on a Brexit deal. That Brexit ‘optimism’ eased today. Fallout from a meeting of PM May’s cabinet suggests that the UK PM has still work to do to convince Conservative MP’s and Cabinet members that a prolonged membership of the EU customs union won’t keep the UK under EU rules indefinitely. The Northern Irish DUP party, supporting the UK government, also isn’t convinced that proposed solutions are workable/acceptable. After the recent rise of sterling, EUR/GBP entered a sideways trading pattern, mostly in the lower half of the 0.87 big figure (currently around 0.8740). Cable is trading higher in the 1.30 big figure, but this is mainly USD softness.
News Headlines
The Northern Irish DUP chief whip, Donaldson, warned that we are heading for a no deal brexit. The DUP is crucial in providing PM May the majority of her government. His comments are a reply to Irish FM Coveney’s statement that Ireland or the EU would never agree to a time-limited backstop or one that could be ended unilaterally by the UK.
Markit revised the final EMU composite PMI up from 52.7 to 53.1, driven by a correction higher for the German Services PMI (54.7 from 53.6). First publications for Spanish (53.7 from 52.5) and Italian composite PMI’s (49.3 from 52.4) were mixed. The Italian gauge drops below the 50 boom/bust mark to the lowest level since November 2013.
