Markets
Global core bond markets hardly moved today as risk sentiment remained more or less neutral. US Treasuries opened unchanged despite rising tensions with Saudi Arabia over the missing Washington Post journalist. German Bunds opened higher, but remain close to Friday’s closing levels. Asian equity markets opened this week in red, with Japanese indices underperforming. It looked like European stock would follow the way lower, but they bounced back. Some are even gaining ground at the time of writing. Moody’s upgrade of Portugal’s credit rating caused a minor outperformance of Portuguese bonds. Spain’s Socialist government announced it will loosen its deficit targets for next year to 1.8% of GDP, compared to the 1.3% agreed to by the previous government. Spanish Bonds lost ground on the news, continuing their recent trend. US retail sales had no influence on bond trading today. Overall retail sales rose 0.1% in September against a 0.6% expectation. The Retail Sales Control Group, an important proxy for the consumption component of GDP, rose 0.5% which is little higher from economist expectations (0.4%). The US yield curve edged lower with changes ranging from -0.2 bps (2-yr) to -1.5 bps (10-yr). The German yield curve steepens a little with changes from -0.4bps (2-yr) to +0.3 bps (30-yr). The Italian 10-year yield spread over Germany narrows by 4 bps, while the Spanish 10-yr yield spread widens by 3 bps.
The new week started in a context of uncertainty. Comments from US policy makers, including US president Trump and Fin Min Mnuchin during the weekend suggested that trade tensions between the US and China might persist for some time. Aside from the threat of additional trade tariffs, the US still ponders whether it should take action against China for weakening its currency. Political strains between the US and Saudi-Arabia are also a growing source of uncertainty. Investors reacted in a strange manner to this uncertainty. Asian equities closed with substantial losses, but European markets are rather calm. The euro showed resilience like last week while the dollar struggled. US September headline retail sales printed soft, but the good figure for the control group suggests that special factors might have been at work. The dollar lost a few ticks after the publication of the retail sales. EUR/USD again tested the 1.16 area. USD/JPY was little affected by the data or the equity performance. The pair trades in the 111.80 area. Markets are confronted with several events risk in the US, in Europe and in a broader perspective and, at least for now, give slightly more weight to US-linked issues rather than European ones.
Markets tried to assess the impact of failed Brexit negotiations this weekend. Sterling lost modest ground in Asian trading this morning. EUR/GBP soon found a new ‘short-term equilibrium’ in the lower part of the 0.88 big figure. Cable mostly followed the intraday swings of the dollar and regained some ground during the day. The pair trades in the 1.3150 area, little changed from Friday’s close. Investors show some fatigue in reacting to the daily news flow on EU-UK separation process.
News Headlines
The EU has demanded a second backstop in case the UK fails to implement the first backstop to the Irish boarder problem, which is a customs union for the British Isles. The second backstop contains plans to keep Northern Ireland in the single market. Northern-Ireland’s Democratic Unionist Party believes a no-deal Brexit is “probably inevitable”.
US retail sales were mixed with the overall retail sales rising 0.1% m/m in September, less than the median forecast of a 0.6% gain. Purchases at food-services and drinking establishments (-1.8% m/m) were to blame with expenses increasing in 10 of the other 12 major categories. The so-called Retail Sales Control Group, which is a good indicator for personal consumption in US GDP, rose by 0.5% (only 0.4% expected) though.
