Markets
Global risk sentiment was already fragile in Asia this morning. Uncertainty on the next steps in the US China trade war persisted and was fueled by headlines that both countries failed to find common ground on a new date for talks planned later this month. Even so, Treasuries initially ceded modest ground. However, safe assets became better bid at the onset of the European trading session. UK politics heading for a key day in the Brexit process inspired further risk-averse investor positioning. UK yields nosedived at the start of the European trading session. The UK 10-y yield touched a new alt-time low near 0.34%. The move also spilled over into German Bunds and other government bond markets. The German 10-y also touched an, albeit minor, now all-time low at around 0.74%.
We didn’t see any relevant positive news on trade or on Brexit. Even so, UK and European bonds ceded a big part the early session gains. Is the price to buy safe haven protection via those markets becoming (too) expensive? Whatever, the move continued going into the US trading session, maybe as markets look forward to a potentially more comforting US eco data, starting with the US manufacturing ISM to be published later this afternoon. The US yields are hovering around the flat-line at the moment of writing. The German yield curve (bull) flattens with the 2y yield rising 1bp and the 30-y yield declining 3 bps. Interestingly, Italian yields continue to outperform despite an overall risk-off context and the expected new government advocating a policy of fiscal stimulus. The Italian/German 10-y yield spread narrows another 7 bp pushing the 10-y yield to a now all time low, too (0.88%). Changes in other intra-EMU government bonds spreads were insignificant (1-2 bp).
In the currency market, the dollar remains the ‘by-default’ preferred option. The trade-trade-weighted dollar (99.30 area) extends the latest uptrend that started last week. Brexit uncertainty and investors assessing the options for (aggressive) easing at next week’s ECB meeting, is causing further investor caution/reluctance on euro long exposure. EUR/USD drifter further south to currently trade in the 1.0950 area going into the publication of the US manufacturing ISM. Will the report confirm the relative outperformance of the US economy vis-à-vis other major developed economies and support further USD gains? USD/JPY is going nowhere trading in the 106.20 area.
Moves in sterling today mirrored to a large extent the price action in UK gilts and other safe have assets. Sterling was heavily sold at the start of European dealings as markets prepared for a crunch vote in Parliament later today. MP’s of the opposition and some dissidents of the Conservative Party are expected to try to block a no-deal Brexit. UK PM Johnson earlier indicated that if successful, this action might lead to early elections, possibly mid-October. Cable tumbled temporarily to the 1.1960 area but rebounded to currently just north of 1.20. EUR/GBP is trading in the 0.91 area after filling offers just below 0.9150 early this morning.
News Headlines
Turkish inflation fell back more than forecast in August, from 16.65% Y/Y to 15.01% Y/Y for the headline measure and from 16.2% Y/Y to 13.6% Y/Y for the core reading. Following yesterday’s upbeat GDP surprise, it’s a second (early) sign that the Turkish economy might have turned the corner. The Turkish lira extended its rally with EUR/TRY declining to 6.30.
The UK construction PMI fell from 45.3 to 45 in August, while consensus expected a further rebound to 46.5. The PMI prints below the 50 boom/bust mark for the 4th consecutive month. Delays to spending decisions contributed to the sharpest fall in new work for over 10 years. Rising risk aversion and tighter budget setting by clients in response to Brexit uncertainty held back activity. The gauge for the manufacturing sector disappointed yesterday.
