Markets
Yesterday’s constructive risk environment after Trump softened his tone towards China continued to dominate markets today. European (and US) stock markets were upwardly oriented even as detailed German GDP figures revealed poor private consumption, declining capital investments and outright slumping exports. Core bonds somewhat counterintuitively eke out gains despite a mild risk-on climate with US Treasuries outperforming German Bunds. US yields add 1 bps at the short end but lose up to 4.4 bps at the very long tenor (30-yr). The German yield curve bull flattens with yields flat (2-yr) to -3.1 bps (30-yr).
Early morning rumours that Italy’s Five Star Movement and the Democratic Party were close to agree on a new coalition with Conte as prime minister were debunked later. 5SM halted talks between the two unless Conte’s premiership is confirmed. The Democratic Party said it hasn’t vetoed Conte as PM but pointed out talks may fail over Di Maio’s (5SM) cabinet ambitions. One would expect downward pressure on Italian bonds given the political stalemate. In fact the opposite is true. Italy’s 10y yield slips a stunning 13 bps while spreads narrow some 10 bps. Other peripheral spreads also narrow with Greece (-10 bps) sharing the top place with Italy.
Greek bonds, having not traded on Monday, profit from PM Mitsotakis’ announcement yesterday that the government will fully lift capital controls from September 1. That might be key in restoring the country’s investment grade rating. The dollar traded little changed during an extremely calm trading session. EUR/USD hovers near opening levels around 1.11 as does the trade-weighted DXY close to but below 98. USD/JPY (105.94) currently fails to retain the 106 handle it recapped just yesterday.
Sterling posted gains today amid reports that the UK opposition Labour Party is stepping up efforts to block a no-deal Brexit. Labour leader Corbyn’s meeting with other opposition MP’s resulted in an agreement to work together to prevent such a scenario. Meanwhile Tory leader Johnson believes there is still enough time to find and agree an alternative to the Irish backstop. He’s to speak with European Commission president Juncker today. EUR/GBP held a downward bias, declining from 0.908 to 0.903 at the time of writing.
News Headlines
The Hungarian central bank (MNB) kept its policy rate (0.9%) and deposit rate (-0.05%) unchanged as expected. The MNB in its statement said that downside risks to inflation trends have strengthened because of recent lower-than-expected underlying inflation and because of the ongoing deterioration in external activity. EUR/HUF trades unchanged in the high 328-area.
The Polish government approved to eliminate its budget deficit in 2020. It would be a first in 30 years’ time and strengthens the government’s economic credentials ahead of October general elections. Strong Polish growth (4% of GDP this year) supports the government’s efforts. The debt-to-GDP ratio is set to fall below 47% next year.
ECB vice-president de Guindos said that market expectations must be taken “with a pinch of salt”, adding that the central bank is data dependent and not market dependent. He admitted though that “we’re going the have low rates for long”.
