Markets
Global core bonds trade mixed today with German Bunds outperforming US Treasuries. The only noteworthy move of the day occurred at the start of European trading after disappointing French and German PMI’s. The Bund leapfrogged higher. EMU PMI’s remain at decent levels though, pointing to 0.5% Q/Q Q3 GDP growth, but details of the PMI’s suggest that risks to future growth appear tilted to the downside. Core bonds treaded water after this one-off move even as equity and oil prices extended gains. The US yield curve bear steepens at the time of writing with yields 1.1 bp (2-yr) to 2.4 bps (30-yr) higher. German yields decline by 0.7 bps to 1 bp across the curve. 10-yr yield spread changes vs Germany ranged between -2 bps and +1 bp.
Yesterday’s positive risk environment reverberated throughout today’s trading session as the recent dominating market moving themes stayed low profile. However, unlike yesterday, the euro couldn’t benefit. EMU composite PMI’s showed a manufacturing led decrease to 54.2 (down from 54.5) but had little and in any case only temporarily impact on trading. The euro eventually did lose some ground against the dollar as American trading kicked in before extending losses after Theresa May’s statement following the EU’s informal summit. Failing the 1.18 test twice this morning, EUR/USD turned south to meet support at 1.175, where it is hovering at the moment. USD/JPY’s profit from the current risk mood remains modest. The pair is currently trading around 112.70. All in all, USD trading was confined to narrow ranges as investors are gradually turning the attention to the Fed meeting next week.
In the recent markets sterling often traded to the tone of the (hoped for, presumed, expected) progress in the Brexit progress. From time to the time, the market had to amend its assumptions on the Brexit-path. In retrospect, it looks that yesterday was again such an inflection point. Over the previous two weeks, markets saw tentative signs that the compromise might come closer. The EU was rumoured to adapt a softer approach on the Irish boarder, in order to provide PM May with a deal that would give her more leverage at home. This hope supported sterling. However, the EU summit in Salzburg didn’t confirm this hope. Both sides openly stick to their positions as deadlines are coming closer. Everyone including the PM can’t but admit that a big gap still needs to be closed, both on the future relationship and on the issue of the Irish boarder. Sterling as a barometer of Brexit-optimism reversed a big part of recent rebound. A no deal scenario remains realistic. EUR/GBP jumped back higher and is again trading in the 0.8975 area. Cable also lost almost two big figures (currently in below 1.31).
News Headlines
IHS Markit reports that Eurozone business activity grew in September at the second-weakest rate since late-2016 (composite PMI fell from 54.5 to 54.2) as manufacturing growth (53.3 from 54.6) was subdued by export orders stagnating for the first time in over 5 year. Service sector output growth meanwhile picked up for a second consecutive month (54.7 from 54.4) even if new inflows of business and backlogs of work hint at slower activity in coming months. Q3 PMI’s suggests that the EMU economy is growing by 0.5% Q/Q.
UK PM May delivered an unexpected statement, following-up on yesterday’s Salzburg Summit where European leaders snubbed May’s proposals. May said the EU and UK are at an impasse, repeated her no go’s and put the ball in the EU camp to come up with new proposals in order to avoid a no deal exit. Sterling lost more ground after her declaration.
Rating agency S&P maintained its Chinese A+ rating (stable outlook), citing the government’s reform agenda, growth prospects and strong external metrics.
