Markets
Global core bonds lost ground today as risk sentiment turned for the better. A nearly empty eco/event calendar set the stage for a return of riskier assets following last week’s slaughter. We have the impression that sufficient bad news is discounted by now, setting the stage for a more pronounced comeback. This week’s multiple earnings (eg Facebook and Apple) and data (eg EMU Q3 GDP, CPI and US payrolls) are the litmus test. The weekend didn’t bring (unexpected) nasty surprises while S&P unexpectedly saved the axe on Italy’s rating. Italian assets outperform today with FTSE MIB +2.5% and the 10-yr yield spread almost 20 bps lower at 288 bps. The German yield curve bear steepens at the time of writing with yields 1.6 bps (2-yr) to 4.3 bps (30-yr) higher. The US yield curve shifts 2.9 bps (30-yr) to 3.3 bps (5-yr) up with the belly of the curve underperforming. German Chancellor Merkel said that she won’t pursue a new term as CDU-party leader at the December party congress nor will she aim for a fifth term as chancellor, but we didn’t see a direct impact on trading.
Risk-on returned to the markets today. The euro intially profited from typical risk trading and reversed morning losses in lockstep with rising European stock markets (1-2%). Political noise from Germany’s Merkel not running for another term as CDU head and chancellor did not spoil the party. Instead, reports suggesting a Chinese tax cut on car purchases boosted sentiment further. Today’s US inflation data were spot on (2.0% YoY, as expected) and had little to no impact on trading. EUR/USD’s extensive 1.14-test around noon failed, however as the dollar remained well bid. The pair is currently changing hands at around 1.137. Brazil’s freshly elected president Bolsonaro triggered a ‘buy the rumor, sell the fact’ in USD/BRL (3.62). The Brazilian real opened markedly higher but could not sustain all gains despite the improved risk environment. The Japanese yen is the usual victim under current circumstances, losing ground vs. the greenback. USD/JPY is nesting comfortably in the 112-zone (112.55).
The impact of today’s (second tier) UK data on sterling was both size and time limited. Philip Hammond is set to deliver the annual budget statement later today. Hammond said on Sunday the UK would need to alter its tax and spending intentions if the EU and UK would fail to secure an agreement. However, even with such a no-deal Brexit looming over the budget plans, the annual statement is rarely key for sterling traders. If anything, the rather modest intraday swings were probably more related to a few conflicting brexit-headlines as well as a shift in global sentiment. The pound gained a few ticks vs. the euro in today’s risk-on setting (EUR/GBP at 0.887). Cable remains fairly stable at 1.28 after last week’s miserable performance.
News Headlines
A Chinese top regulating body proposed to cut taxes on car purchases by half from 10% to 5% as car sales are on track for their first annual drop in 20 years. The move could be seen as another measure to support the Chinese economy which had been slowing down this year due to the ongoing trade conflict. Earlier, the country tried to beef up bank lending and to prop stock markets.
Following another electoral blow in Hessen, Germany’s Angela Merkel said she would stand down as head of the CDU party, signaling the end of 18 years of party leadership. She also intends to finish her 2021 term as chancellor but would not seek a fifth term.
The Belgian economy expanded 0.4% QoQ (1.7% YoY) in the third quarter. Growth in the second quarter was downwardly revised from 0.4% to 0.3% QoQ (1.4% YoY).
