Markets
Global core bonds showed no clear trend today despite a general risk off climate. Both the German Bund and US Treasuries initially edged higher, albeit very gradually. Core bonds printed a little spike after US president Trump complained China isn’t buying farm goods as promised, adding “they just don’t come through”. His comments suggest difficult trade talks ahead. The up-leg lacked momentum however. A second attempt following slightly below consensus US PCE data also failed. German inflation data (regional and HICP) were mixed with little impact on trading. US yields eventually closed unchanged, erasing losses inflicted by early US investors after a stellar Conference Board consumer confidence (135.7). German yield changes are close to unchanged, with only the very long end declining 1 bp (30-yr). Peripheral spreads widen further with Italy (+5 bps) again underperforming.
The euro in general and EUR/USD show remarkably resilient today. The EMU eco data, including a below census French GDP and poor EC confidence indicators and German inflation drifting further away from the 2.0% inflation target, all could be used to sell the euro. However, the opposite occurred. Yesterday afternoon EUR/USD already bounced off the 1.1100/10 support area. The pair temporarily lost a few ticks in Asia but turned again north from the start European dealings. An escalation of the EU-UK Brexit row won’t help to support confidence in the EMU and in theory should be a euro negative. However, it was also ignored. US president Trump accused China of unwillingness to buy American agricultural products. The Trump headlines only reinforced a risk-off reaction on equities, to a lesser extent in core bonds, but dollar lost some further ground, both against the euro and the yen. Is this just investor repositioning ahead of tomorrow’s Fed policy meeting? Or is the euro bought back as low-yielding funding currency in carry trades? At 1.1150, the pair has again some breathing space versus the 1.11 support area. USD/JPY is losing a few ticks trading near 108. 50.
The UK government openly heading for a clash with the EU is raising the odds of a no deal Brexit. This uncertainty reinforced the sterling sell-off that restarted yesterday morning. Sterling dropped below important technical levels against the dollar and the euro as markets adapted positions to this developing political situation. EUR/GBP surpassed the 0.91 resistance overnight and ‘easily’ extended gains beyond this level today as there is no sign that the EU or the UK are prepared to consider a compromise. EUR/GBP is currently trading in the 0.9150/60 area. The EUR/GBP 0.9307 2017 top is the last defence ahead of the post Brexit top (0.9415 area). The decline of cable was a bit less violent today as the dollar lost against the euro. Even so, near 1.2120 the pair touched the lowest level since March 2017 this morning. Interesting to hear the assessment of the BoE at Thursday’s policy meeting.
News Headlines
China’s Politburo said it would take up efforts to support the economy a notch as investors await more stimulus from the government to kickstart growth, which has slowed to a multi decade low. However, China will not resort to short-term measures such as easing curbs on real estate, it said. Such a move could spur a further build-up in household debt and risk property bubbles. Meanwhile, China’s central bank increased lending quotas of commercial banks and told them to step up lending appropriately, sources reported.
Turkish finance minister Albayrak said he expects Turkey to post positive growth close to its 2.3% target in 2019 but admitted that the budget deficit is likely to be higher than previously thought. On monetary policy, Albayrak added he anticipates “significant rate cuts this period”.
