Markets
Global core bonds gained ground today. European equities opened in red as did the Italian BTP future following yesterday’s reports that Italy’s Tria was heading for an early return home from a meeting between Eurozone FM’s. His colleagues gave him a hard time on Italy’s 2019 budget. This morning, Claudio Borghi, head of the lower house budget committee, commented that Italy could resolve its debt problems more easily if it had its own currency. His comments, together with Italy’s deputy PM Di Maio repeating that his coalition won’t move an inch away of the current 2.4% budget deficit proposal, further supported Bunds. Later, Borghi downplayed his comments saying Italy had no plan to ditch the euro. The strong bond market opening didn’t push through and German yields rebounded. The German yield curve bull flattens with yield changes ranging between -1.0 bps (2-yr) and -3.1 bps (10-yr). 10-yr spread changes vs Germany are widening with Greece (+12 bps) and Italy (+8 bps) underperforming. Italian 10-yr yield spread vs Germany even touched an intraday high 300 bps early in the session, the widest level since April 2013. US yields are moving from little changed -0.4 bps (2-yr) to a decrease of -1.8 bps (10-yr).
There was no meaningful data to guide global FX trading today. The dollar profited from an early session initial risk-off environment. The latest IMF’s global growth warning and some renewed stress in emerging market currencies (Indonesian rupiah, Indian rupee) possibly caused a moderate flight to safety. EUR/USD extended an initial downleg as Europe sent Italy’s Tria home to redo the budget homework. 5-SM leader Di Maio flexed muscles saying they “won’t move a millimeter from the 2019 budget plan”. However, sentiment turned slightly for the better as American traders joined in the early afternoon. After touching an intraday-low around 1.15 EUR/USD, the pair regained some ticks and is currently trading in the low-mid of the 1.15/16 area. USD/JPY reversed intraday losses partially, hovering around 113.75.
UK data was mixed as the construction PMI (52.1 vs. 52.9 expected) disappointed slightly while house prices increased a tad more than anticipated (2.0% YoY vs. 1.9%). However, the numbers were paid no attention to as markets nervously awaited former foreign minister Boris Johnson’s speech at the Tory party conference. Sterling lost ground in the run-up, testing the 0.89-zone, as some feared Johnson would seize the premiership. While he did not do so formally, he reminded the party his availability as a new leader if they deem it necessary. Johnson did not address the rumors of a new (and even softer) brexit compromise but tore May’s Chequers proposal into the ground. He urged party members to back Theresa May’s “original” plan she set out at Lancaster House in 2017, in which the UK leaves the customs union and the single market. Sterling initially gained slightly after his last minute message of ‘loyalty’ but retraced soon. EUR/GBP is hovering near intraday-highs at the 0.89-mark.
News Headlines
Boris Johnson delivered a speech at the Tory party conference in Birmingham. He didn’t claim the PM title as some suggested in the run-up, but told UK conservatives to “back Theresa May (into a corner?) by supporting her original plan”. He referred to her Lancaster House speech and not the Chequers proposal. At Lancaster, PM May said that the UK should leave the customs union and single market and that no deal would be better than a bad deal.
The UK construction sector grew at its slowest pace in 6 months, according to the Markit PMI which unexpectedly declined from 52.9 to 52.1 in September. Political uncertainty remains a drag, but details showed some underlying strength with strongest new orders since December 2016 and fastest employment growth since December 2015.
Russian President Putin is reportedly joining the country’s central bank and minister of Finance in backing a “dedollarization” plan to protect the country from future (US) sanctions.
