Markets
Core bonds lost ground today in a volatile session with US investors returning after Labour Day. Asian stock markets finished on a high note which resulted in a strong European opening as well, causing a first downleg in core bonds. The move didn’t last even if Brent crude rallied from $78/barrel to $79.50/barrel with tropical storm Gordon causing havoc in the Gulf of Mexico (evacuation of rigs). Risk sentiment dwindled with EM FX under new selling pressure after disappointing South-African Q2 GDP data. The country enters a technical recession (2 consecutive negative growth quarters). EMU PPI accelerated more than forecast in July (0.4% M/M, 4% Y/Y), but went unnoticed. Core bonds faced new selling pressure as US investors entered dealings despite the risk-off climate. US Treasuries underperformed German Bunds. The move comes at a straight time with trade event risk (Canada/US talks; possible action on additional $200bn Chinese goods) looming as well. Medium term, we continue to expect higher US yields with supply rising in Q4, the Fed tightening policy further and the economy steaming ahead. The US yield curve bear steepens with yields 0.6 bps (2-yr) to 3.5 bps (30-yr) higher. The German yield curve bear flattens with yields rising by 1.5 bps (2-yr) to 0.6 bps (30-yr). 10-yr yield spreads vs Germany narrow up to 5 bps with Greece underperforming (+6 bps) and Italy (-12 bps) outperforming. Italian BTP’s rallied after Lega Salvini suggested to let the budget deficit widen to 2% of GDP instead of the rumored 3% of GDP. That way, Italy pledges to respect EU rules and might avoid a short term rating downgrade.
Today, European investors nervously await the next steps of the US administration in several high profile battles in their crusade to change global trade (Canada, China tariffs, dispute with the EU autos, amongst others). Several EM markets/currencies (ZAR, ARS, INR….) extending losses added to the negative sentiment. Safe haven flows turned to the dollar. EUR/USD slipped below the 1.16 mark. Of late, global sentiment often improved as US traders joined the fray. Losses of US equity futures were modest compared to the performance of European equities., but US investors showed some caution, too. Core yields also rose with the dollar getting most additional interest rate support. All this helped the dollar to maintain intraday gains. EUR/USD settled in the 1.1550 area. Interestingly, USD/JPY (111.25 area) also held up well despite the risk off. The trade-weighted dollar trades in the 95.50 area.
Sterling avoided further losses after yesterday’s decline. Eco data were again soft with BRC sales and the UK construction PMI printing soft/weaker than expected. However, the data had no big impact on sterling. EUR/GBP lost a few ticks in line with the overall EUR/USD decline. BoE’s Carney and two other MPC members attended a hearing before the Parliament’s Treasury Committee. Questions mostly concerned the impact of brexit on the economy rather than concrete issues on monetary policy in the near future. Sterling shows a mixed picture with EUR/GBP returning to the 0.90 area. At the same time, cable (1.2850) is also losing modest ground on USD strength.
News Headlines
Euro zone’s producer prices rose more than expected in July. The PPI (MoM) rose by 0.4% from 0.3% in June, while a stable figure was expected. The year-on-year figure rose 4% last month from 3.6% in June (3.9% expected). Again, higher energy prices were the biggest contributor to the rise in producer prices.
In the US, the ISM Manufacturing index rose sharply to 61.3 in August, from 58.1 in July, while consensus was a decline to 57.6. Meanwhile, Canada’s manufacturing growth lost further momentum in August, as the index declined for a second straight month to 56.8 (from 56.9 in July and 57.1 in June).
