Markets
Global core bonds lost ground today. German Bunds opened neutral after the German economy shrank 0.2% in the third quarter, more than the 0.1% decrease expected and down from the 0.5% growth in Q2. This move wasn’t a surprise as the Eurozone GDP number was lower than expected despite solid growth in other EU-countries (Italy excluded). German Bunds reacted little on the news, as the slowdown is expected to be a temporary bump. Risk sentiment improved through the day with European equities moving back into green territory after opening with losses. US equity futures hint this sentiment will persevere at US openings, putting pressure on bond markets. Italian bonds dropped at the open after the government didn’t alter its 2019 budget proposal yesterday despite EU warnings. However sentiment on BTP’s improved later. The US yield curve bear steepened with changes across the curve ranging from +0.8 bps (2-yr) to +2.6 bps (30-yr). German Bonds were little changed with moves from -0.4 bps (5-yr) to +0.3 bps (30-yr). Credit spreads over Germany widen in Greece (+5 bps) and Italy (+6 bps).
The (trade-weighted) dollar started the session with a cautiously positive bias. However, most USD cross rates stayed off the ST peak touched earlier this week. The EU-German interest rate differential are also a few bp off recent cycle peak levels, but the spreads remain a high hurdle for potential USD shorts. There was again plenty of event risk with potential to move the dollar (swings in the oil price, equity volatility, the EU-Italian budget quarrels, Brexit, the EMU growth data and US CPI). Out of this big package, no topic was really able to take the lead in guiding USD trading. Early this morning, the dollar retained the benefit of the doubt but the US currency couldn’t maintain gains. US (headline) CPI (2.5%) was as expected, but the core reading (2.1%) was marginally softer than expected. This was no really big issue, but in the meantime, EUR/USD returned to the 1.13 area. Global equities and oil are looking for a bottom, but in the current environment it isn’t clear whether this is a supportive for the dollar, rather than for the euro. USD/JPY is still going nowhere, holding near 114.
Sterling traders were keenly awaiting some guidance for the UK political today as Brexit enters a key phase. At the time of writing UK PM May is explaining/defending the Brexit text to her Cabinet. Press headlines as usual provided support for the case of both sides. For now, given recent rally, sterling investors were reluctant to put more money on a positive outcome (or at least to further progress). EUR/GBP returned north of 0.87. Regarding the data, UK headline CPI was a touch softer than expected at 2.4% Y/Y. However, the broader UK price data brought little news to warrant a repositioning on UK interest rate and/or FX markets. EUR/GBP trades currently in the 0.8725 area. Cable hovers in the mid 1.29 area.
News Headlines
Central European countries reported Q3 GDP growth, but details aren’t available yet. The Czech Republic was a negative outlier, with only 0.4% Q/Q growth, the slowest pace since Q3 2016. Bulgarian GDP printed at 0.5% Q/Q. Polish growth accelerated by an astonishing 1.7% Q/Q while Hungary posted a better-than-expected 1.2% Q/Q. Slovak GDP growth accelerated to 4.6% Y/Y.
Swedish inflation unexpectedly slowed in October, from 2.5% Y/Y to 2.4% Y/Y. The setback raises uncertainty on whether the Riksbank will start its normalization cycle in December or in March. EUR/SEK tried to regain previously lost support around 1.2850. The news on the political front wasn’t better, with Moderate Party Leader Kristersson losing a confidence motion in parliament to lead the next government.
The German Bundesbank warned in its Financial Stability Review that the country’s financial sector is ill prepared to face a next recession. The long growth cycle may have inflated asset prices and blurred the sector’s view on future credit risks.
