Markets
The fall in US Treasuries finally halted yesterday and edged substantially higher in last US trading hours. European equity markets lost substantial ground but US equities underperformed with losses up to 4% (Nasdaq). At first, US Treasuries didn’t profit that much from the US equity correction. However, some kind of safe haven bid kicked in after the US 3-& 10-y auctions. The German bund paired its intraday losses and closed yesterday’s session little changed. Yesterday evening, President Trump said that he thinks the Fed has ‘gone crazy’ as he thinks interest rates are too high. The US yield curve edged lower with the belly of the curve outperforming the wings. Changes ranged between -2.1 bps (30-yr) and -5.3 bps (5-yr). Today, global sentiment will set the tone for bond trading, but US inflation data are important, too. Strong inflation numbers would support the case for a continuation of the Fed’s hiking cycle, but might further complicate global investor sentiment. So, it is not evident to see how this will turn out for US yields/bonds. We expect the Bund to catch up with US Treasuries and open substantially higher this morning. Italian BTP futures closed yesterday’s session similar to the German Bund: little changed. Italy will test the bond market today as it will sell up to €6.5bn bonds, including a new three-year bond. With the EU and Italy still in deadlock, we expect continued pressure on Italian bonds. Later in the session, the US 30-year auction will also be an interesting barometer for global bond market sentiment.
Yesterday, the risk-off correction (amongst others driven by uncertainty on EM and on the Italian budget), finally reached to US. The risk-off move this time didn’t support the dollar. While, the risk-off correction in USD/JPY was ‘logic’, the US currency also lost ground against most other major peers. The USD losing interest rate support might have played a role. The jury is still out, but yesterday’s price action maybe also suggests markets are considering a re-pricing of US assets. Late in the session, President Trump stepped up its critics on the Fed rate hike policy. The impact of the comments is difficult to measure but this interference with the Fed’s independence hardly can be considered USD supportive. The risk-off correction continues in Asia with steep losses across markets (up to 6% in Taiwan). There is some fall-out on EM currencies (e.g. the KRW), but losses are mostly not excessive given the overall sell-off. The dollar remains in de defensive against the likes of the yen or even the euro. Today, global risk sentiment will be the main factor for global FX trading. Data will probably be of second tier importance. In case of a higher than expected US CPI, nervousness might even intensify. It’s not sure that this would be a USD supportive. We also keep a close eye at investor interest for the 30-y US Treasury auction. Of late, we had a cautious USD positive bias, putting the risk for EUR/USD to drift further south in the 1.15/1.13 range. In the wake of the overnight movements, we amend our day-to-day EUR/USD bias to neutral. Some more erratic trading might be on the cards if US assets would join the risk-off.
News Headlines
US President Trump shed light upon the Fed and US markets again. He wondered whether the central bank has ‘gone crazy’ and said they are ‘making a mistake’ for ‘being so tight’. He did not blame them for the current correction in US stocks though, saying it is a ‘correction that we’ve been waiting for a long time’.
While hurricane Michael undoubtedly threatens oil supply, markets now fear the potential impact of weaker global economic growth following IMF downgrades on demand more. API data showing increased oil supplies further underscored a bearish sentiment. Oil prices extend yesterday’s losses, falling more than 1.6%.
Starting November 10th, a new US panel can review and block a wider array of foreign investments in American companies creating technology that needs safeguarding for national security reasons. Up until now, only takeovers and controlling stakes were reviewed. The new program also targets joint ventures and smaller equity stakes.
