Markets
US Treasuries fell hard yesterday on strong US eco data, rising oil prices and positive comments of Fed chairman Powell. The steep decline continued during Asian trading, but lost pace as European markets opened. Core bonds even recovered some of the lost ground throughout the day. German Bunds underperformed, catching up with the US Treasury’s move of late yesterday/overnight. European equities trade in negative territory, apart from the Dax (German markets were closed yesterday). US stock markets opened around 0.25% lower, with Nasdaq underperfroming. Italy’s BTP’s treaded water after the recent turbulence, unmoved by PM Conte’s comments that Italy’s deficit targets will be lowered to 2.4%, 2.1% and 1.8% for 2019, 2020 and 2021 respectively. The news that 5SM leader Di Maio confirmed that Finance Minister Tria will stay on, didn’t support the BTP neither. US weekly jobless claims hovered near multidecade lows and confirmed ongoing strength on the US labour market. Investors shrugged off the move, eying tomorrow’s payrolls. German yields add 1.7 bps (2-yr) to 5 bps (10-yr) today with the belly underperforming the wings. 10-yr spread changes vs Germany marginally decrease with the exception of Greece (+6bps). Differences on the US yield curve range between -0.2 bps (5-yr) and +0.4 bps (2yr).
Tentative dollar strength following yesterday’s yield spike receded at the start of European dealings. This is despite a negative risk climate (emerging markets under pressure as dollar strengthens) that usually triggers some kind of flight to safe havens the greenback is considered to be. Instead, the euro proved quite resilient today and recovered part of yesterday’s losses. The common currency perhaps benefited from narrowing US/EMU-spreads and from some easing of Italian tensions. EUR/USD is trying to regain 1.15-handle, while the trade-weighted dollar (DXY) is losing, slipping back to the 95.7-zone. USD/JPY is struggling to maintain its freshly capped 114-mark as the yen profits more from today’s risk off sentiment.
Lack of meaningful data resulted in some technical trading in sterling today. As May’s keynote speech concluded the Conservative Party conference ended yesterday, attention now shifts back to the UK-EU negotiations. Brexit related news was scant, however. If any, some positive comments from EU sources saying the new British (yet unconfirmed) proposal on a backstop for the Irish border issue, was a “step in the right direction” might have been slightly sterling positive. Under the proposal, the UK would impose a minimum of regulatory checks on goods travelling between Northern Ireland and the mainland in return for a stay in the customs union for the whole of the UK. Although that would dissolve the Irish border issue, it remains yet to be seen if the EU will accept this so called “cherry picking” while Northern Ireland strongly opposes any kind of border with the mainland. Anyway, sterling eked out yesterday’s gains, trading at around 0.885 EUR/GBP, up from 0.887. Cable is currently trying to recover the 1.30-mark.
News Headlines
Greece is rumoured to consider setting up an SPV that would allow banks to off-load some of their huge stock of bad loans. The construction is said to possibly include a government guarantee on some bonds issued to finance the vehicle.
Claims for US unemployment benefits dropped in the week to September 29 to 207 000 from 215.000 in the previous week. A stabilization in the number of claims was expected. This level of claims is holding near the cycle low (202 000, early September) and is close to the lowest since November 1969. The report suggests ongoing strong/tight labour market conditions as markets are looking forward to the BLS September US payrolls report, scheduled for release tomorrow.
