Markets
Global core bonds lost some ground today. German Bunds underperform US Treasuries. The Italian BTP future opened weaker in follow-up action on Friday’s sell-off, but the lack of new, worse, news over the weekend rapidly put an intraday floor below BTP’s. Technocrat FM Tria is still in place and rating agencies didn’t pull the trigger on a rating downgrade (BBB-, Baa1) yet. However, EU Commissioner Moscovici warned ahead of tonight’s Eurogroup meeting about the “deviation” in Italy’s budget. Whatever, radio silence on Italy helped improving general risk sentiment in combination with the US-Mexico-Canada trade deal and rumours about a new UK proposal to the brexit status quo. European and US stock markets gain over 0.5%. The German yield curve steepens at the time of writing with yield changes ranging between -0.5 bps (2-yr) and +3 bps (30-yr). 10-yr yield spread changes vs Germany are broadly unchanged with Italy (+3 bps) underperforming. US yields rise by 0.1 bp to 0.8 bps across the curve.
This morning, EUR/USD started the new quarter with a tentative negative bias. Uncertainty how EU officials will react to last week’s Italian budget still weighed on the euro. At the same time, American equity futures and the dollar profited from the new trade agreement between the US and Canada. However, sentiment on European equity markets also improved quite soon after the start of trading. The pressure on Italian assets eased, preventing further losses of the single currency. EUR/USD found a new intraday equilibrium in the 1.16 area, waiting more specific news on the EU assessment of the Italian budget and looking forward to the US eco data later today/this week. USD/JPY extended its established uptrend supported by a global constructive risk sentiment and higher core yields. The pair hovers near the 114 big figure.
Today, sterling traders closely monitored the speeches at the Tory party conference in Birmingham. Headlines from Birmingham outweighed eco data. UK eco data were mixed. August lending data were soft, but the manufacturing PMI unexpectedly rebounded from 53.0 to 53.8 in September. Sterling hardly reacted to the data. In the meantime, several speakers at the Tory meeting indicated that they wouldn’t give in to the hard stance of the EU in the Brexit negotiations. EUR/GBP gradually rebounded from the 0.8880 area to the 0.8915 area. In the afternoon, sterling suddenly gained ground on market headlines that the UK was working on a new proposal, considering technical controls in the Irish sea as part of the ultimate backstop plan regarding the Irish boarder. EUR/GBP trades currently again in the 0.8880 area. Cable is changing hands around 1.3060. For now, there is no official confirmation from UK government on the new plan. It is also unclear whether hardline Brexiteers with the Conservative party will accept the new proposal. In this context, we remain cautious on any further sterling gains.
News Headlines
UK PM May is ready to propose a new solution for the Irish border. Under the plan, the UK would keep goods regulations in Northern Ireland closely aligned with the EU rules applying in the Irish Republic. In that case, new regulatory checks on goods passing between Northern Ireland and the British mainland are needed/proposed.
The EMU unemployment rate dropped to its post-crisis record low of 8.1% in August, from 8.2% in July. The unemployment is lowest in Germany (3.4%) and highest in Greece (19.1%), although it dropped significantly over the last year. The final figure of the Markit Eurozone Manufacturing PMI was downwardly revised from 53.3 to 53.2.
UK’s Manufacturing PMI rose unexpectedly from 52.8 in August to 53.8 in September, while a decrease was expected to 52.5. New Orders rose to 53.2 from 52.4 a month before. Meanwhile, in the US the ISM Manufacturing was 59.8 in September, from 61.3 in August which is still strong and in line with expectations.
