Markets
Global core bonds lost ground today with US Treasuries underperforming German Bunds. Risk sentiment improved over the weekend as oil prices stabilized. All Asian indices except the Chinese closed today’s session with gains. European equities continued and edged immediately higher to hold on to those gains throughout the day. The improvement in risk sentiment pushed German Bunds south. Weaker than expected German IFO numbers had little to no impact. ECB President Draghi addressed the European Parliament today. He admitted that recent economic data have been weaker than expected but repeated a gradual slowdown is normal. As expected, he did not make any key alterations to the ECB’s guidance. Italy’s Deputy PM’s Salvini and Di Maio signaled a new openness to make some modifications to the 2019 budget and added that a downward adjustment of Italy’s 2019 budget deficit is not unthinkable. Investors welcomed the Italian willingness, pushing Italian BTP’s higher. The German yield curve moved north with changes ranging from +0.9 bps (2-yr) to +2.1 bps (10-yr). US equities are currently continuing the improved sentiment and move gradually higher. The Chicago Fed Nat Index printed 0.24 in October, up from 0.17 a month before and higher than the 0.18 consensus. US yields rallied higher with moves from 2.1 bps (30-yr) to 3.4 bps (5-yr). Peripheral bonds spreads over the German 10-yr yield decrease with Greece (-18 bps), Italy (-16 bps) and Spain (-8 bps) outperforming.
EUR/USD suffered on both sides of the fraction last Friday as weak (German and EMU) PMI’s made markets ponder the ECB’s hiking intentions. Meanwhile the fragile risk environment and tumbling oil price supported the dollar. But the euro entered calmer waters today. An improved risk sentiment, tentative signs of the Italian government to amend the budget proposal, (temporarily) narrowing US/EMU interest rate differentials and even the Brexit agreement on Sunday were all to some extent euro supportive. The common currency edged gradually higher before losing some ground ahead of Draghi’s hearing at the European Parliament. The ECB chair basically repeated the economic assessment he elaborated during the October policy meeting. Without going into any details, he acknowledged the softer than expected data but stresses that at least a part is related to a temporary weaker momentum (e.g. the German car industry). The ECB remains confident about inflation with core measures expected to pick-up towards the end of the year because of the ongoing economic expansion, the ECB’s monetary policy and wage inflation. The euro reacted as one could expect, trading virtually stable and close to 1.136, up from 1.134 this morning. USD/JPY is heading north (113.4) in today’s risk on environment.
The UK and EU rubber stamped the Withdrawal agreement and the political declaration on the future ties between the two blocs yesterday. As the decision was widely expected, it did not affect sterling materially. Today’s economic calendar didn’t provide markets with inspiration either, leaving sterling’s intraday swings confined to a rather narrow range. The pound losing a few ticks vs. the euro during early trading hours was mainly due to euro strength following a conciliatory tone from Italy. The move reversed soon after, keeping EUR/GPB stable vs. its Friday close. Cable rose slightly, changing hands at around 1.285. Markets gave sterling a break today after a turbulent month. But the Queen’s money may soon face a new test as PM May planned a vote in the British Parliament on December 12. Expect some erratic sterling trading in the run-up to this so called ‘meaningful vote’.
News Headlines
US Federal Reserve Vice Chairman Quarles will succeed BoE’s Carney as chairman of the Financial Stability Board (FSB) for the next three years. Dutch central bank president Knot will serve as vice chair and take over from Quarles in December 2021. The FSB is the world’s most important international body to monitor the global financial system.
