Markets
Trading showed two faces on Friday with a new sell-off in TRY initially causing risk aversion. Investors don’t want to be wrong-footed with Turkish markets closed for national holidays this week. Both Moody’s and S&P cut the country deeper into junk territory after the bell. Global risk sentiment eventually improved late in the US session as the WSJ reported that low-key Sino-US trade negotiations resulted in a planned November Summit between the two countries. US stock markets closed up to 0.4% higher. The S&P 500 closes in on a test of the all-time high at 2872. US yields eventually declined up to 1.2 bps (2-yr) with the belly of the curve underperforming the wings. Changes on the German yield curve ranged between -1.2 bps (30-yr) and -1.7 bps (5-yr). 10-yr yield spread changes vs Germany widened up to 2 bps. The dollar fell prey to profit taking. A small short squeeze in EUR/USD propelled the pair from 1.1377 to 1.1438, with the upleg briefly interrupted by the Turkish malaise. USD/JPY closed at 110.50, down from 110.90. EM currencies like BRL or ZAR ended nearly unchanged. Friday’s eco calendar was empty, apart from disappointing August Michigan consumer confidence which dropped to a 1-yr low. Sterling lost more ground on Friday as a UK official said that Brexit-talks broke down again on the Irish border issue. EUR/GBP ended the day at 0.8972, coming from 0.8946.
It’s a quiet trading session overnight. Asian stock markets trade mixed, the US Note future flat lines and the dollar recovers some of the ground lost on Friday. We expect a neutral opening for trading. Today’s eco calendar is empty apart from speeches by ECB Weidmann and Atlanta Fed Bostic. Weidmann told Handelsblatt this weekend that the ECB is on course to normalize monetary policy. We don’t expect groundbreaking views. Bostic is a voting governor with a neutral stance. US markets could react if he indicates a strong preference to hike rates two more times this year (negative US Treasuries, positive for dollar). Overall, we expect trading condition to remain thin and calm at the start of the week. The calendar only turns interesting on Wednesday (FOMC Minutes), Thursday (EMU PMI’s & ECB Minutes), but especially Friday (Powell’s Jackson Hole speech). We expect sterling to remain under downward pressure. Brexit-talks between Brexit Strategist Raab and the EU’ chief negotiator restart in Brussels tomorrow with a speech by Raab planned on Thursday. The UK Telepgraph reports this morning that the conservatives are setting out their no-deal Brexit scenario.
News Headlines
The China Banking and Insurance Regulatory Commission ordered Chinese banks to support infrastructure projects and companies facing “temporary difficulties”. It also said financial institutions should “effectively promote stable employment and stabilize foreign trade and investment”.
Both US and Chinese officials said they are trying to end the trade standoff ahead of planned meetings between President Trump and the Chinese leader Xi Jinping in November. The scheduled midlevel trade talks starting on Wednesday in Washington should pave the way for the high level November meetings.
Rating agencies S&P and Moody’s cut Turkey’s credit rating on Friday from BB- to B+ and from Ba2 to Ba3 respectively. The weak currency, out of control inflation and the current-account deficit are amongst the country’s key vulnerabilities, leading to a recession next year, according to S&P.
Greece has successfully exited its 3-yr bailout program, the ESM said today. ESM Chair Mario Centeno is wrapping up the program as Greece can now “stand on its own feet” after being locked out of international markets for 8 years by high interest rates.
