Markets:
Global core bonds are steady today. Both German Bunds and US Treasuries are hovering near opening levels awaiting developments on the Italian budget proposal and brexit. Italy had until today to submit a revised budget proposal to the European Commission. Italy’s La Stampa reported that the government had no intention to leave its stance on the 2.4% budget deficit for 2019, while PM Conte was seeking a partly conciliatory answer to the EU. At the time of writing, no new proposal was sent to Brussels yet. Italian BTP futures slid to this month’s low but rebounded after decent 3-yr, 8-yr and 20-yr bond auctions. German Bunds remained steady despite the marginal improvement in risk sentiment overnight. German ZEW expectations for November printed -24.1, up from -24.7 in October. Markets expected a further decline to -26.0. Moves in German yields are mixed with changes ranging from -0.6 bps (30-yr) to +0.6 bps (3-yr). Despite steady US Treasuries, the US yield curve edges lower with changes between -1.0 bps (30-yr) and -3.4 bps (5-yr) as it catches up after yesterday’s close. Credit spreads over Germany are steady, with Greece (+5 bps) underperforming.
EUR/USD rebounded during Asian dealings from yesterday’s fresh 2018 low (1.1218) on easing trade tensions following reports that China’s VP will visit the US. The pair retreated at first European trading hours, but edged higher afterwards in lockstep with European equities as risk sentiment turned for the better. A slightly less negative German ZEW-indicator (expectations) might have supported the recovery. Today’s risk climate proves fragile as (European) equities struggle to maintain gains. EUR/USD on the other hand holds on tight to intraday-highs even though the Italian budget deadline (midnight) draws near. It suggests the euro has discounted enough bad news at current levels. The common currency is probably also enjoying brexit spillovers (see below). EUR/USD is trading close to 1.127. USD/JPY’s rally this morning again halted at around 114.10, dropping to 113.9, only marginally higher than yesterday’s close.
Brexit headlines were constructive today with deputy PM Lidington saying this morning a deal is “almost within touching distance”. As EU/UK negotiations proceed, PM May told her Cabinet ministers to remain standby for a meeting as talks with Brussels are expected to close as early as today or tomorrow. Sterling entered European dealings quite stable but started rallying soon on the prospect of an imminent brexit deal. The pound received backing from a strong but largely anticipated labour report. Worth mentioning however is the strongest uptick in wages since 2008 (3.2% 3M/YoY), suggesting increasing inflationary pressures. EUR/GBP’s fall halted around noon before dropping below the 0.87-handle. Sterling bulls shrugged off EU comments, saying they are “not there yet”. Cable is on a 1.30 mark pursuit. Brexit optimism reigns for now.
News Headlines:
The research division of OPEC has lowered its projections for the 2019 oil demand growth. It calculated that world oil demand growth will rise by 1,29m b/d next year, lower than the 1,36m b/d forecast of last month. Saudi Arabia’s energy minister already said on Monday that a 1m b/d drop in oil supplies is necessary to balance the market.
ECB Praet said that the ECB should look through recent economic slowdown signs and continue its normalization. On PSPP reinvestments, he admitted that the passive loss of duration of the ECB’s bond portfolio will over time tend to steepen the yield curve as the central bank’s forward guidance keeps the front end of the curve well anchored.
