Markets
The path of least resistance remains lower for core bond yields. Monday’s US-Sino trade hope turned out to be a one-sided interpretation by US President Trump, with China unaware of phone calls to restart talks. Beijing is nevertheless willing to continue discussions. The brokered US-Iran talks at the G7-Summit were also coldly welcomed by Iranian president Rouhani, who first wants sanctions to be removed. Mixed US eco data didn’t leave a trace on trading. US stock markets opened the trading day with gains with soon started to return gains to eventually close up to 0.5% lower. It marked the start of an outperformance of US Treasuries vs German Bunds. The US yield curve bull flattened with yields losing 1.7 bps (2-yr) to 8.5 bps (30-yr) in a daily perspective. The German yield curve flattened as well with daily changes varying between +0.7 bps (2-yr) and -5.9 bps (30-yr). EUR/USD remains an island of calm. The pair closed the session at 1.1090 from a 1.1102 open after showing very little intraday volatility. Sterling benefited from a more upbeat tone from German Chancellor Merkel and French President Macron on the sidelines of the G7 Summit with both seemingly more willing to explore alternatives to the Irish backstop. Another supporting factor was news that UK Labour leader Corbyn is trying to coordinate opposition against a no deal Brexit in UK parliament. EUR/GBP closed the session at 0.9024, down from 0.9085.
Most Asian stock markets manage to hold on to minor gains with China slightly underperforming. The Chinese yuan is fixed somewhat stronger than expected, ending it’s 9-day slide. USD/CNY changes hangs around 7.15. The German Bunds and US Note future are a tad softer. Today’s eco calendar is extremely thin apart from EMU M3 money data, but those aren’t market movers at this stage. We expect existing trading patterns to hold. German (10-yr) and the US (5-yr) tap the bond market. Demand in Germany will be closely watched like last week when some expected a buyer’s strike for the 30-yr Bund auction. Similar circumstances triggered profit taking on the 2014-Q1 2015 Bund rally. Speeches from Fed’s Barkin and Daly are wildcards with cracks appearing within the FOMC over whether or not to cut the policy rate again in September. Some regional governors last week advised against it, but we also recall Fed Chair Powell’s strong hint at the Jackson Hole symposium. He stated that “anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy and that could include uncertainty about trade policy.” Italian politics deserve attention as well with unlikely coalition partners PD and 5SM still trying to forge a deal. Italian President Matterella would call for immediate elections if they are unable link up by today according to the Repubblica. BTP’s weathered the storm so far.
News Headlines
Sweden is looking into issuing bonds with a maturity as long as 100 years, joining other countries such as Austria. Much of Sweden’s yield curve is trading below zero, making the prospect of locking in these extremely low rates for the long term “interesting and worth looking into”, Debt Office Director General Lindblad said. The agency will return with an evaluation on October 23.
Romania’s PM Dancila (PSD) faces a no-confidence motion within six weeks after liberal coalition partner ALDE pulled the plug out of the government over a clash over the budget and a dispute for a joint candidate for November presidential elections. UMDR, an ethnic Hungarian partner, said it won’t support Social Democratic party (PSD) minority government, assuring near-certain defeat for Dancila in the confidence vote.
Brazilian central bank policy makers unexpectedly announced a dollar spot auction yesterday, upping market intervention that started two weeks ago. The central bank will continue to intervene throughout September, officials said. The Brazilian real was closing in on 4.2, the last hurdle to the 4.25 all-time low before recovering to 4.13 after the news got public
