Markets
Global core bonds continued where they left of at the end of last week, losing more ground. Trading volumes were rather low. The eco calendar was empty apart from a disappointing Empire Manufacturing business survey. Most investors remained sidelined awaiting a possible announcement of the US regarding additional tariffs on $200bn of Chinese goods. The threat pulled commodity prices lower, but core bonds thus failed to profit. European stock markets also didn’t really suffer losses like their Asian/Chinese equivalents overnight. German Bunds slightly underperformed vs US Treasuries. The continuation of the BTP rally is probably at play. Italian media reported that the FM pledged to hold the 2019 budget deficit at 1.6% of GDP while Lega would be pushing for tax incentives for Italian households to buy BTP’s and hold them until maturity. 10-yr yield spreads vs Germany narrowed slightly with Portugal (-4 bps), Greece (-7 bps) and Italy (-12 bps) outperforming. German yields increase by 0.4 bps (30-yr) to 2 bps (5-yr). The US yield curve bear steepens with yields 0.4 bps (2-yr) to 1.7 bps (30-yr) higher. The US 10-yr yield and 30-yr yields are testing first important resistance levels, respectively around 3% and around 3.15%.
USD trading showed a diffuse picture today. At the start of European dealings, EUR/USD set intraday lows in the 1.1620/30 area. It looked that the dollar would continue profiting from renewed investors uncertainty on the US-China trade war as rumours suggested that President Trump could impose additional tariffs on Chinese imports soon. However, the downside in EUR/USD was well protected. It wasn’t clear whether that was due to euro buying rather than USD softness. Both US and German yields kept an upward bias. Interest rate differentials are little changed. ECB’s Draghi last week confirming that the ECB is moving closer to reaching the inflation target helps putting a floor for the euro. European equities also didn’t perform that bad given the price action in Asia this morning. A further easing of tensions on Italy might also support the euro. The jury is still out and things can change again once there is clarity on the next steps of the US government on trade. The dollar is trading soft, but at the same time, the euro shows signs of resilience, too. EUR/USD is trading in the 1.1680/90 area. USD/JPY is little changed in the 112 area.
There were again plenty of Brexit headlines today. Investors still try to find out whether a Brexit deal has become more likely after recent ‘softer’ comments from EU officials (Barnier speaking of ‘de-dramatising’ the negotiations on the Irish boarder). For now, it remains unclear whether any Brexit deal will get enough support within PM May’s conservative party. This weekend’s comments from Boris Johnson at least suggest that any Brexit deal will face a tough battle when brought to the UK Parliament. With no concrete signs of any further progress in the Brexit process, last week’s cautious sterling rebound petered out. EUR/GBP still hovers in well-known territory in the 0.89 area. Cable regained the 1.31 big figure, but this was mainly due to US softness rather than sterling strength.
News Headlines
Italy’s Deputy PM Salvini and his party, Lega Nord, are working on a proposal to cut taxes for Italian savers who purchase sovereign bonds and keep the bonds until maturity. The proposal would be part of the 2019 budget, for which the deficit, according to Finance Minister Tria, will be no more than 1.6%.
The New York Fed Empire Index fell to 19.0 in September, from 25.6 in August, while only a decrease to 23.0 was expected. The index dropped to its lowest level since April. The focus on the future however, is more positive. The 6 month expectation for the index is estimated to read 30.3.
The IMF warned today that all options for the UK leaving the EU involve a substantial amount of costs, with a no deal scenario topping all other scenario’s. The organization estimated that the repercussions will be larger for the UK than the EU, backing the importance for UK PM May to strike a deal with the European Union.
