Markets
EUR/USD set a minor new 2019 low yesterday (and this morning) just above the 1.09 barrier. There wasn’t that much news at hand with recent dollar strength just continuing. The trade weighted dollar passed above 99 and is ready to attack this year’s high (99.37). The overall search for dollar liquidity is a supportive factor for the greenback, especially as we near quarter-end. ECB Chief Economist Lane said there’s still room to cut interest rates further, but it is known that he’s part of the dovish wing inside the ECB. Overall market sentiment was also slightly risk-off as the publication of the whistleblower complaint accused the White House of trying to cover-up the presidential call between Trump and his Ukrainian counterpart. US stock markets lost up to 0.5%. USD/JPY held near opening levels (107.8). US Treasuries outperformed German Bunds. The US yield curve bull flattened with yields declining by 2.5 bps (2-yr) to 4.4 bps (30-yr). Changes on the German curve ranged between -0.8 bps (10-yr) and -1.7 bps (30-yr). 10-yr yield spread changes vs Germany vary between +2 bps and -2 bps. EUR/GBP hovered up and down 0.8860 without showing clear direction. The Brexit debate in UK parliament becomes more tense, but the stalemate remains.
Asian stock markets lose ground this morning with China (flat) outperforming and Japan (-1.5%; ex-dividend day) underperforming. The key Japanese inflation gauge (ex fresh food) slowed more than expected in September (from 0.7% Y/Y to 0.5% Y/Y), raising bets that the BoJ’s policy review will end with a fresh stimulus programme at the October 31 meeting. Core bonds show no clear direction. Today’s eco calendar contains EC economic confidence data, US durable goods orders, personal income/spending data and PCE deflators. We think that the Fed at this stage is most concerned about activity data. Income and spending numbers might therefore be most important.
Weakness at the level of the US customer could be an omen for weakness spreading through the fabric of the economy. The situation on the repo market should be closely monitored given continued high demand for dollar liquidity at the NY Fed’s repo operations. Dollar strength is therefore expected to stay. With EUR/USD 1.0926 slowly giving in, we eye the 1.0778/1.0821 as key support. Overall risk sentiment will probably remain guarded as well. CNBC reports about October 10 high-level US-Sino trade talks, but this constructive news is overshadowed by the Democratic impeachment inquiry. Uncertainty over the rapidly developing story should might dampen investor mood ahead of the weekend. Core bonds should profit with end-of-quarter buying normally being supportive as well. US Treasuries could outperform Bunds. Sterling gains a few ticks this morning on rumours that UK Cabinet members will try to force UK PM Johnson at the tory party conference into lowering his demands and accepting the Brexit deal proposed by the EU. We hold our view that sufficient positive news is already discounted in sterling at current levels.
News Headlines
Three UK cabinet ministers are preparing to confront PM Johnson over his Brexit strategy after the Tory annual conference next week, The Sun reported. According to the newspaper, one minister will push Johnson to “lean in and take what he can get” since senior aide Cumming’s aggressive strategy “has clearly failed”.
In its draft 2020 budget, the French government presented the tax cuts that president Macron promised to the Yellow Vest movement. The lowest income tax rate will be slashed to 11% from 14% while low earners will receive a bigger state bonus. Housing levies will continue to be phased out. The increase in spending is expected to help France grow 1.4% this year and 1.3% in 2020..
The central bank of Mexico has cut rates from 8% to 7.75%. The decision was not unanimous with 2 boards members voting for a half-point cut. The bank cited lingering economic concerns and is worried about a potential credit rating downgrade. At the same time, uncertainty about inflation risks remain high.
