Markets:
Global trading started the week with a cautiously positive bias even as there were few important data and as investors are looking forward to Thursday’s ECB policy meeting. Asian equities still received some support from the PBOC announcement last Friday to cut the Reserve Requirement Ratio to facilitate financing for the economy. Early in European dealings, German July exports unexpectedly rose by 0.7% M/M. The market expected a 0.5% monthly decline. Imports declined more than expected though so there is no reason for euphory, especially not given the flood of disappointing data releases from Europe’s largest economy of late. Whatever the reason, European equities opened modestly higher and European/core yields gained a few basis points. Markets apparently ‘fear’ that the ECB and the Fed might take a more cautious/gradual approach when providing additional stimulus compared to the quite aggressive easing that was/is expected up until recently, at least by a big part of the market. The US yield curve bear steepens with yields rising between 3 bps (2-y) and 7 bps (30-y). The long end of the German yield curve again suffered and the underperformance of German Bunds grew (slightly) this afternoon on headlines/rumours that Germany was considering some kind of shadow budget to facilitate public investments beyond the restrictions of national budget rules. German yields are rising between 2 bps (2-y) and 9 bps (30-y). Intraday EMU (10-y) spreads with German were little changed with Spain/Portugal (-2 bps) and Greece (-6 bps) slightly outperforming.
Changes in the major dollar cross rates were small. EUR/USD traded with a tentative positive bias this morning, but gains were capped in the 1.1040 area. The euro gained some further ground this afternoon on rumours regarding least strict German budget rules (cfr supra). However, traders clearly were cautious to buy into the headlines. EUR/USD is trading in the mid 1.1045/50 area. USD/JPY tries to regain the 107 barrier.
Sterling started the day on a weak footing as the political chaos/stalemate on Brexit (and within the conservative party) only grew during the weekend. However, the UK currency succeeded a remarkable intraday rebound. UK monthly production/activity data were better than expected. Markets also saw some easing in Johnson’s tone on Brexit as he admitted that not reaching a deal will be a political failure. At the same time talks between Johnson and the Irish Prime Minster didn’t bring big progress. Later today, another tumultuous meeting in the UK Parliament is expected. Johnson probably won’t get the early election he wants for mid-October. Visibility on the next steps in the Brexit process remains low. Even so sterling is holding most of this morning’s gain. EUR/GBP is trading in the 0.8940 area. Cable is trading in the mid 1.23 area.
News Headlines:
Reuters cites people familiar with internal German discussions over setting a “shadow budget” to circumvent restrictions on constitutionally enshrined debt rules and boost investments in infrastructure and climate protection. Spending would be accounted for under the European Stability and Growth Pact.
UK PM Johnson and Irish PM Varadkar held “positive and constructive” talks in Dublin. Significant gaps remain though between both government’s position on how to secure an open Irish border after Brexit. Johnson still aims at a deal by October 18 to keep his vow of leaving the EU by October 31. UK parliament later today is expected to approve legislation to ensure a no deal Brexit won’t happen. Johnson will probably trigger a new vote over an October 15 election as well. It will be parliament’s final session before the prorogation kicks in.
