Markets
Global core bonds resumed yesterday’s upward trend, but the pace slowed especially in the Bund. US Treasuries are the outperformers today with event risk looming (US/Canadian trade talks) over the long US weekend (Labour Day on Monday). Core bonds only gained momentum from the start of US trading onwards, with the Bund ignoring a weaker opening for European stock markets. The latter stabilized afterwards. Yesterday’s EM FX sell-off stalled, though the dollar gains traction and might still hurt them going forward. August EMU CPI data fell just short of consensus for both headline and core readings, but that didn’t wrongfoot investors following yesterday’s Spanish and German readings. The US yield curve bull flattens at the time of writing with yields 1.6 bps (2-yr) to 2.6 bps (30-yr) lower. German yield declines range between -0.4 bps (2-yr) and -1.7 bps (10-yr). Peripheral yield spreads vs Germany widen up to 5 bps with Italy underperforming going into tonight’s rating update by Fitch. We don’t expect the BBB rating to be downgraded yet (waiting the budget verdict), but a negative outlook is likely. The 10-yr yield spreads vs Germany is currently testing the post-election high of 290 bps.
Today, global (FX) markets tried to assess the potential consequences of latest comments from US president Trump on trade politics. Yesterday, press articles indicated is considering additional tariffs on Chinese imports. The US president also rejected EU proposals for the automobile sector and accused China en the E(M)U of artificially weakening their currency. Initially, the damage for the euro was modest. EUR/USD even temporary rebounded to the high 1.16 area, but lost ground later. EMU August CPI printing softer than expected (2.0% Y/Y) might have been a slightly negative for the single currency. EUR/USD dropped to yesterday’s low (1.1640/45 area) and finally broke through this level early in US dealings. Even so, the euro losses remain modest given rising trade tensions. USD/JPY is also holding a modest downside bias as the yen attracts safe have flows (USD/JPY currently near 110.75/80).Among the smaller currencies, the outperformance of the safe haven Swiss franc is catching the eye. The EUR/CHF pair is nearing the 1.1242 August multi-month low. Markets are pondering the chances of renewed SNB interventions.
Sterling entered calmer waters after the repositioning/short squeeze on Wednesday and, to a lesser extent, yesterday. EU’s Barnier stressed after a meeting with UK’s Raab the urgency of backstop deal on the Irish border. Without a workable agreement on this issue there is no deal. The aim is still to reach a deal by October but there is flexibility till November. The comments of Barnier didn’t bring any high profile news on the Brexit progress. Contrary to Wednesday, the reaction of sterling was very limited. EUR/GBP held a tight sideways range roughly in the 0.8960/90 area. Cable is losing a few ticks (currently 1.2960 area), but this is mostly due to some modest USD gains.
News Headlines
Eurozone inflation dropped to 2.0% (YoY) in August, slightly lower than the 2.1% from July. The inflation is close to the ECB’s goal of just under 2%, but is mainly caused by high increase in energy and food prices. Core inflation, without energy and food, remains weak in August at 1% (against 1.1% in July).
European Commission President Jean-Claude Jucker said he hoped the July “ceasefire” agreement with US President Trump remains intact, after Trump rejected an EU offer to eliminate tariffs on cars. He added that the EU would react in kind if the US would break the agreement and impose new tariffs anyway.
Turkey’ President Tayyip Erdogan has said that the Turkish lira was being targeted in an operation. He added the country will in response take the necessary measures and overcome its currency volatility . This morning, the government raised taxes on dollar deposits up to a year, ending four days of lira depreciation.
