Markets
US and Chinese trade negotiators labelled the Saturday phone call as constructive. It was enough for markets to kick off the trading week on a positive note. Although European stock gains quickly eroded, core bond yields held on to the (admittedly small) rise. Things abruptly changed after a government source told news agency CNBC that the mood in Beijing about the trade deal is pessimistic. Stocks slipped, core bonds reversed intraday losses and now trade near Friday’s close. It is testament to how desperate investors are in seeing the partial trade deal confirmed. The US yield curve is currently losing 2 bp across the different tenors. German yields changes went from 1-2 bps to zero. Peripheral spreads narrow 2 bps (Greece) to 4 bps (Italy). The Belgian government successfully sold 2029 bonds (€651m at -0.064%) and 2031 bonds (€653m at 0.076%). The auction’s bid-to-cover was substantially higher compared to previous auctions (3.13 and 2.64 respectively) but came with bigger tails. The auction was the final one for this year. The gloomy trade that triggered an intraday reversal in bonds had virtually no impact on EUR/USD. The couple headed further north during early European trading hours and moved sideways from then on to fill bids at around 1.106 currently. The Japanese yen is the unsurprising winner. USD/JPY went for a test of 109 but that failed miserably after the CNBC report came out. The pair is currently changing hands at 108.7.
Prime Minister Johnson said the Conservatives wants to cancel plans to cut corporation taxes (from 19% to 17%) to funnel money to the National Health Service, a.o. The obvious market reaction would probably have been a (marginal) decline in sterling. But the pound advanced instead, more than offsetting Friday’s marginal loss and resuming the broader strengthening move that started early last week. There wasn’t a clear driver that underpinned today’s rise though. We assume that the prospect of the Tories winning the elections as suggested by recent polls trumps anything else for the time being. EUR/GBP dipped from 0.856 at opening to about 0.853. Cable eked out gains to 1.296, up from 1.29 this morning. The currency pair came close to a test of the 1.30 resistance area.
News Headlines
ECB’s vice president Luis De Guindos signaled that the current composition of bank capital requirements may need to be rebalanced to give the countercyclical capital buffer (CCyB) a more prominent role. De Guindos pointed out that only a small fraction of bank capital requirements are in the form of CCyB. The countercyclical capital buffer is designed to help counter pro-cyclicality in financial markets by protecting the sector from excess aggregate credit growth during economic upturns and by reducing a constrained credit supply during downturns.
UK’s prime minister Boris Johnson announced his Conservatives are putting on hold further cuts on corporation tax next April. The tax rate was due to fall to 17% from 19% but Johnson pointed out that businesses had already gained from a succession of corporation tax cuts in recent years. The government aims to save money to spend more on voters’ priorities such as the state-funded National Health Service.
The Bundesbank predicted that the German economy is likely to stagnate in Q4. The German central bank signals that although the country averted a technical recession and the German manufacturing sector slump is showing signs of bottoming out, there is nevertheless little sign of a rebound any time soon.
