Markets
Even more than was the case earlier this week, Brexit headlines dominated trading on global markets today. Early this morning, investors took a wait-and-see stance as there was already quite some Brexit optimism discounted. This wasn’t only visible in the strength of the pond. This week’s rise in European equities and in core (European) yields also suggested that investors had adapted positions toward the rising chance of a positive outcome of the Brexit negotiations. For the ‘Brexit reflation trade’ to continue, more concrete news on an accord was needed. This positive news flashed on the screens during the morning session as UK and EU officials announced they had reached a deal. Core (UK/EMU & US) yields jumped higher and so did regional equities and the euro. At -0.33%, the German 10-y yield touched the highest level since the second half of July. However, even with a Brexit deal sealed, doubts soon resurfaced. The Northern Irish DUP said it won’t approve the deal in the Parliamentary vote on Saturday as it couldn’t accept customs checks in the Irish Sea. In this context, it isn’t evident for Boris Johnson to get the deal approved. Part of the ‘Brexit-hope trade’ evaporated this afternoon. US and European equities retain modest gains. German/EMU yields reversed their earlier rise. In a volatile market, German yields currently have changed less than 1 bp compared to yesterday’s close. US yields are about 1-2 bp higher across the curve. Investors still question the Fed intentions on additional rate cuts at the end of this month and in December given recent weaker US data and a soft Fed assessment in yesterday’s Beige Book. US eco data (housing data, Philly Fed and production data) were mixed to slightly weaker than expected but had only a limited impact on trading.
The picture in the major currency cross rates was slightly different compared to the bond markets. EUR/USD jumped from the 1.1070 area to the 1.1140 area on the headlines of a Brexit deal. However, contrary to the reversal in the bond markets, EUR/USD quite easily maintains most of the Brexit related gain. This suggest that some underlying USD softness might also still be in play. EUR/USD currently trades in the 1.1125 area. USD/JPY Brexit-gains were limited and the pair currently even trades slightly lower in the 108.65 area.
Understandably, sterling took the full hit of the intraday volatility due to developing Brexit story. EUR/GBP spiked lower to fill bids well below 0.86 on the announcement but tested the 0.87 area as the DUP said it won’t support the deal. The pair currently trades in the 0.8675 area as investors try to find out the arithmetic for the Brexit vote in the UK parliament. Cable spiked temporarily to the high 1.29 area but trades currently again in the 1.28915 area.
News Headlines
The German government has slashed its 2020 growth forecast from 1.5% to just 1% as Brexit, the car sector and global trade tensions continue to hold the export oriented economy in a tight grip. It did not change projections for 2019, leaving it at a poor 0.5%. Although Economy Minister Altmaier sees no threat of an economic crisis, quarterly growth dynamics are expected to show a technical recession in Q3, possibly paving the way for fiscal stimulus.
The US Philly Fed business outlook declined more than expected (5.6 vs. 7.6 from 12.0). Details however showed it was mainly due to a strong setback in prices paid. The new orders component rose to a solid 26.2. Shipments fell from 26.4 to 18.9 but is still above average. The employment component almost doubled from 15.8 to 32.9, the strongest level in the current cycle.
