Markets
Global core bonds quickly reversed an early downward trajectory at the start of European dealings. Both German Bunds and US Treasuries edge higher today even though there was little news or data to guide markets. Investors likely erred on the side of caution as uncertainty surround the many looming events (Fed, Brexit) and data releases later this week lingers. Trump’s ragetweet (cf. below) might have triggered additional jitters in an already fragile risk environment. The German yield curve eventually bull flattened with daily yield changes varying from -1.1 bps (2-yr) to -2.6 bps (30-yr). Its 10-yr yield is again testing -0.4%. Peripheral spreads widen with Italy (+4 bps) underperforming. UK’s 10-yr yield (-5 bps) sets a new multiyear low with the yield only lower in the aftermath of the 2016 referendum vote as investors see a no-deal Brexit ever more likely. US yields slip about 1.2 bps to 2 bps across the curve.
EUR/USD trading was order driven as investors are looking forward to a series of key events and data later this week, including the restart of the US-China trade talks, the Fed policy decision and the US payrolls report. Investor risk sentiment turned more cautious in Europe, but improved again during the US trading session. Core yields declined slightly, but the interest rate differential between the US and Germany/EMU hardly changed. The dollar slightly outperformed the euro. A hardening of positions between the EU and UK on Brexit doesn’t help the single currency. EUR/USD hovered in the lower half of the 1.11 big figure and came again close to the 1.1100/15 support area but a real test/break didn’t occur (yet). The pair trades again in the 1.1120 area. The yen rallied temporarily in Asia this morning, but USD/JPY rebounded, currently again trading in the 108.65 area. The dollar retains the benefit of the doubt going into the Fed decision.
During the weekend and this morning, the Brexit noise intensified again less than one week after Boris Johnson become the new UK PM. Several Ministers of the new cabinet indicated they still prefer the UK to leave the EU with a deal, but only one that is acceptable/more favorable for the UK. At the same time, EU officials ‘unisono’ defend the position that they are not prepared to drop the Irish backstop arrangement. Markets fear that it will be difficult to find common ground before the October 31 deadline. The new UK government is also raising the pressure as it announced stepping up the preparations for a no-deal Brexit. The flaring up of harsh Brexit rhetoric on both sides triggered a new sharp wave of GBP-selling. EUR/GBP is nearing 0.91 technical resistance which marked the lowest level for the pound against the euro after the sterling mid 2017 lows. (EUR/GBP 0.93 area). Cable (1.2260 area) also fell of a cliff and is already trading at the lowest level since Spring 2017.
News Headlines
In a new ragetweet, US president kept pressure on the Fed to lower rates, saying it will probably “do very little by comparison” with the EU and China, who will “further lower interest rates and pump money into their systems”. The Fed is expected to cut rates by 25 bps on Wednesday.
Europe has narrowed down its search for a European candidate to be the next head of the IMF to three. A first round of talks will be held with former Dutch Finance Minister Dijselbloem, World Bank president Georgieva (Bulgaria) and Bank of Finland governor Rehn.
