Markets
Global core bond sentiment improved today. German Bunds outperform US Treasuries. The rise occurred gradually. Rumours about a potential downward revision to tomorrow’s new ECB growth forecasts could be at play. The ECB might even shift its risk assessment from broadly balanced to downward according to the same people familiar with the matter. The ECB story combines a stronger Bund with the fragile improvement in risk sentiment. With the ECB’s policy straightjacketed at least until next year’s Summer, we don’t expect any lasting impact. Today’s eco calendar was empty apart from disappointing, but outdated, July industrial production data and lower-than-expected US PPI. Brent crude remains near the cycle high just below $80/barrel. The US Treasury continues its mid-month refinancing operation tonight with a $23bn 10-yr Note auction which probably holds back US Treasuries compared with German Bunds. US yields drop by 0.8 bps (2-yr) to 1.8 bps (10-yr) at the time of writing. German yields decline by 1.2 bps (2-yr) to 2.7 bps (10-yr). 10-yr yield spreads vs Germany are broadly unchanged with Spain, Greece (+3 bps) and Italy (+6 bps) underperforming.
Today, (European) markets showed a diffuse picture and this was also visible in the EUR/USD cross rate. European equities outperform Asia but gains remain modest. US equity futures also turned into wait-and see modus. EMU July production was weak/well below consensus. US PPI was also softer than expected. So, this complex wasn’t able to provide a clear guide for USD trading. EUR/USD traded with a tentative negative bias. FX traders maybe are inclined to expect an ongoing soft approach from ECB’s Draghi at the press conference tomorrow. This might cap the upside of EUR/USD. However, trading in the high 1.15 area, EUR/USD shows no directional trend at all. USD/JPY(111.30) is losing a few ticks in line with the overall intraday risk sentiment. In broader perspective, the pair also holds a tight consolidation pattern between the borders of 109.78 and 112.15.
Brexit noise’ continued to dominate sterling trading. The question remains whether the brexit glass is half full rather than half empty as conflicting headlines continued appearing on the screens. On the one hand, the UK and the EU are said to announce a special summit in November to sign a Brexit deal in the coming days. This suggests at least some progress in the Brexit process. At the same time, the BBC reported that at least 50 pro-Brexit lawmakers from PM’s conservative party held a meeting to discuss whether the UK PM should be ousted. In his state-of-the-union, EU’s Juncker also indicated that Europe could make no compromise on key issues even as the EU wants to maintain a very close relationship with the UK. Last week, sterling succeeded a bumpy rebound as market saw some potential progress, but current diffuse picture leaves sterling trading again in a limbo. EUR/GBP is going nowhere in a tight range near the 0.89 big figure. Sterling hovers in the 1.30 area.
News Headlines
The European Parliament has voted on punitive actions against Hungary for neglecting EU rules on democracy. The “article 7” action now starts which can lead to a suspension of Hungary’s EU voting rights. However, all 27 EU nations have to agree and Italy and Poland already declared to veto the proposed punishments.
Rebel members of May’s party released a proposal for the Irish border issue. They said it would allow trade to flow over the Irish border with respect to the integrity of the EU’s Single Market. Meanwhile, conservative Eurosceptic MPs are discussing a plot to remove May, as the disagreement with her Chequers Brexit plan grows.
US PPI fell 0.1% on a monthly basis in August, which is the first decline in 18 months. The year-on-year rate slowed to 2.8% last month, against 3.3% in July (3.3% was expected). Excluding food and energy prices, the PPI printed at -0.1% (MoM) and 2.3% (YoY).
