Markets
Global core bonds gained ground today. After US equities closed last week’s session with substantial losses, Asian indices opened mixed this morning. Chinese equities outperformed on news that the Chinese government will study and implement new tax cuts. However, European bourses couldn’t maintain the positive momentum and are trading in red, pushing investors to safe havens. European bonds all gain on the deterioration of risk sentiment with the exception of Greece and Italy. Italian BTP’s jumped higher at openings as Italian media reported that the ECB could launch a new round of LTROs, though they weren’t able to hold on to those gains. BTP’s move south ahead of tomorrow’s budget deadline when the Italy has to present its revised budget proposal to the European Commission. The Italian Parliament budget watchdog sees a 2.6% deficit in 2019, as the government’s 1.5% growth projections for next year is too ambitious. The BTPs gradually edged lower throughout the day, also in the run-up of tomorrow’s auction. The Italian Treasury sells 3-, 7- and 20-yr bonds. Furthermore, there was no economic data to steer trading today. US markets were partially closed as well (Veteran’s Day). German yields are declining with the belly of the curve underperforming. Changes range from -1.4 bps (2-yr) to -2.2 bps (5-yr). Peripheral yield spreads over Germany widen with Italy (+5 bps) and Greece (+4 bps) underperforming.
The most striking event on global FX markets already happened this morning just before European traders returned from weekend: EUR/USD dropped below the bottom of the 1.13/1.1850 consolidation pattern that guided trading since end May. There was no high profile trigger for this break. Dollar resilience after last week’s US mid-term election and the Fed firmly holding to its intended rate hike path apparently were a sign for some remaining USD shorters to throw the towel. The break below the 2018 low caused some further stop losses USD buying/euro selling. Thin trading conditions (US Veterans’ Day holiday) probably also played a role. Lingering uncertainty on Italy and a cautious attitude on (European) equity markets maybe was a tentative supportive for the dollar, too. However, EUR/USD selling pressure eased during the session. EUR/USD trades in the 1.1265 area. USD/JPY decouples from the broader USD rally. The risk-off sentiment and negative pressure from EUR/JPY also weigh on the USD/JPY headline pair (113.80 area).
Sterling initially remained in the defensive today. Cable dropped below the 1.29 mark on broad USD strength. EUR/GBP also traded close too, mostly slightly above 0.8750 for most of the day as investors had again to acknowledge the binary risk of PM May potentially failing to secure a political majority to approve whatever deal that might be reached with the EU. During the afternoon, sterling jumped higher on press headlines referring to EU’s Barnier. He was said to have indicated that the main elements of a deal text might be finalized very soon. EUR/GBP trades again in the 0.8725 area. This scenario of course doesn’t solve the risk of political approval in the UK. So, more sterling volatility might be on the cards.
News Headlines
German CSU leader Seehofer announced to step down as party leader following this month’s dismal local election result which was the worst since 1950. He held that post since 2008. Seehofer wants to keep his function of interior minister in the national government.
The Financial Times reports that EU chief Brexit negotiator Barnier told diplomats that the main elements of an exit treaty are ready to be presented to the UK cabinet tomorrow.
