Markets
Today, Brexit headlines dominated trading on UK markets, but were also key driver of sentiment on global markets. Evidently, the impact on UK markets was the biggest. Several UK cabinet members resigned this morning, including Brexit Secretary Raab. Markets concluded that Parliamentary approval of the Brexit text had become even more unlikely than before. Political uncertainty in the UK will be very high in the near future. Sterling got hammered. EUR/GBP jumped north of the 0.88 big figure. Still, UK PM May defended the deal in a Parliamentary hearing. At the end, headlines flashed on the screens that leading Brexiteer Rees-Mogg submitted a letter for a leadership challenge, indicating a further weakening of PM May’s position. Sterling touched a new intraday low, awaiting upcoming events. UK interest rate markets for now don’t believe the warning of the BoE’s Carney that the Bank could be forced to raise rates in case of a no-deal Brexit. UK yields are declining sharply, with markets pricing out the chances of a BoE rate hike next year. October UK retails were also reported weak, suggesting the economy might feel ever stronger headwinds from ongoing political uncertainty. However, the release had little additional impact on markets. UK PM has finished the hearing before Parliament. However, it is very well possible that additional political event risk might come to haunt markets. Currently, EUR/GBP is trading in the 0.8830 area. Cable is testing the 1.28 barrier. The august correction low (1.2662) is still at distance, but (political) developments are these days going fast in the UK.
The developments on Brexit also affected global sentiment and triggered a broader risk-off correction after a positive start of European equity markets and US futures. For now, the correction remains orderly and the impact on the dollar and on the euro remains modest. EUR/USD tumbled from the mid 1.13 area to fill bids below 1.1280 this morning, but the pair currently trades back in the 1.13 area. So for now, the fall-out from Brexit on the euro remains modest. To put it otherwise, the dollar gains are maybe a bit disappointing. USD/JPY is also losing ground, but yen gains remain modest as well. USD/JPY is trading in the 113.15 area, holding recent ranges. Aside from Brexit, several US data was printed, including retail sales, Philly Fed and Empire manufacturing confidence. The data was mixed and hardly affected USD sentiment in the wake of Fed’s Powell’s comments overnight.
Global core bonds gain ground today as a deteriorating risk sentiment drove markets today (mainly caused by brexit headlines). Overall, Brexit impact remains muted. German Bunds and US Treasuries edged higher as UK government resignations crushed hopes of the UK-EU brexit agreement. At noon, core bonds temporarily reversed part of their initial gains, but soon resumed the daily uptrend. Italian BTP’s opened higher as well as PM Conte signaled he wants to cooperate with the EU on the budget impasse, but those gains were paired rather quickly on the overall risk-off sentiment. Italian BTP’s currently trade below opening levels. German yield curve edges lower with the belly of the curve outperforming. Changes range from -2.4 bps (30-yr) to -4.2 bps (10-yr). US yield curve shifts in a similar fashion with changes from -2.9 bps (2-yr) and -4.6 bps (10-yr). Worsening risk sentiment widens 10-yr yield spreads over Germany with Greece (+12 bps), Italy (+8 bps) and Spain (+6 bps) underperforming.
News Headlines
Luigi Di Maio, Italian Deputy PM and leader of 5SM, said the government is looking for options to avoid the ‘excessive deficit procedure’ established in the EU’s Stability and Growth Pact. He stressed that he did not want Italians to have to make the sacrifices.
US data were mixed today. Retail sales were close to expectations. Headline sales rose a strong 0.8% in Oct. but core (control group) sales rose only 0.3% (0.5% was expected) and the September figure was downwardly revised from 0.5% M/M to 0.3%M/M. The Empire Manufacturing confidence gauge was stronger than expected (23.3 in Nov from 21.1 in Oct), while the Philadelphia Fed Business Outlook fell to 12.9 from 22.2 in Oct.
