Markets
Global core bonds traded mixed today with the US Note future near opening levels and the German Bund losing ground. The Bund’s underperformance is mainly related to positive brexitnews. Germany is supposedly ready to accept a less detailed agreement on the UK’s future economic ties with Europe. Difficult decisions can be postponed until the UK is in the post-Brexit transition phase, leaving time to focus solely on the Irish backstop plan for the time being. UK Gilts and German Bunds sold off on the news. Earlier in the session, core bonds for a second straight session couldn’t profit from weakness on stock markets and in EM FX. The eco calendar didn’t affect trading. German yields increase by 2.5 bps (2-yr) to 3.8 bps (10-yr). US yields add 0.4 bps (5-yr) to 1.3 bps (30-yr). 10-yr yield spread changes vs Germany narrow up to 4 bps with Italy again significantly outperforming (-15 bps) as Lega Salvini stressed once more to align with EU budget rules. The significant move in the BTP markets suggests a serious rebalancing/short squeeze. The positive Italian vibe also helps explaining the Bund’s underperformance.
The dollar initially showed no clear trend. Asian and European equity markets came under pressure despite a decent close in the US yesterday. EM remained in stormy waters. Safe haven flows supported the dollar during the morning session. EUR/USD dropped below 1.1550, but, as was the case yesterday, couldn’t maintain initial gains. EUR/USD returned to the high 1.15 area. Eco data were second tier and had no impact on USD trading. Global risk sentiment improved slightly during the afternoon session. This change was not due to high profile news from EM or from the US trade policy, but inspired by press headlines that the UK and Germany would accept a less detailed text for the Brexit agreement, raising the chances on a deal. The brexit-driven improvement in global sentiment both propelled EUR/USD (currently 1.1625) and, to a lesser extent, USD/JPY (111.70 area). Even without taking into account this afternoon’s ‘brexit-spike’ of EUR/USD, we are disappointed on the overall performance of the US currency. The dollar could have gained more on the EM/trade story or on recent strong US eco data.
Sterling continued trading with a slightly negative bias this morniong. Eco data were not to blame. The UK services services PMI unexpectedly increased (54.3 from 53.5). Markit indicated that this week’s combined PMI reports point to 0.4% Q/Q growth in the Q3 (unchanged from Q2). Sterling ignored the data. The UK currency even remained in the defensive as tensions between the UK and Russia on the Salisbury Novichok murder intensified. Later in the afternoon, fortunes finally changed in favour of the UK currency on Bloomberg headlines that Germany and the UK agreed to accept a vague text for the Brexit deal. Sterling jumped higher upon the headlines. EUR/GBP trades currently in the 0.8960 area. Cable jumped to the 1.2980 area. The report isn’t confirmed yet by Germany or the UK.
News Headlines
UK’s services sector grew faster than expected in August, with Markit/CIPS Services PMI climbing to 54.3 against 53.5 in July (53.9 was expected). The composite PMI expanded as well, from 53.6 to 54.2. According to Markit, UK GDP could sustain a 0.4% growth (QoQ) in Q3, which is rather positive despite looming brexit uncertainty.
EU Trade Commissioner Malmstrom will host US Trade Representative Lighthizer on Monday for a first meeting since EC President Juncker and US President Trump agreed last month to freeze new tariff threats and start up new trade negotiations. Malmstrom already said the two partners still have “profound disagreements”.
The German and British government have dropped key brexit demands, easing the path for the UK to strike a deal with the EU on a divorce. Germany is willing to accept a less detailed agreement on future trade ties, while the UK is willing to postpone some (major) decisions until after brexit day. Sterling gained ground on the news.
