Markets
It was a rude awakening for (European) investors yesterday after horrible September PMI prints sent shivers through markets. The German manufacturing sector deteriorates at the fastest pace since the global financial crisis with forward looking components not offering a brighter picture. Additionally, weakness is spreading to the domestic services industry. Developments on an EMU wide level are similar, but to a lesser extent. The market reaction resembled the August recession trade: core bonds surged with Bunds outperforming US Treasuries, EUR/USD returned below the 1.10 handle (1.0993 close) though without testing the 2019 low (1.0926). (European) stock markets lost up to 1%. US PMI’s disappointed as well, but hold north of the 50 boom/bust mark. US stock markets ended flat after recovering from a soft start. That helps explain US Treasuries returning off the intraday tops. The German yield curve bull flattened in a daily respective with yields 2.2 bps (2-yr) to 7.7 bps (30-yr) lower. 10-yr yield spread changes vs Germany remarkably narrowed by up to 3 bps with only Greece underperforming (+4 bps). The US yield curve steepened slightly with yield changes varying between -0.3 bps (2-yr) and +1.1 bp (30-yr).
Asian stock markets are mixed this morning with China and Japan outperforming. Core bonds and USD/JPY (107.60) offer no rule clues for the start of today’s trading neither. Japanese September PMI’s declined somewhat further (48.9 manufacturing; 52.8 services). PBOC governor Yi said that China has ample monetary policy room to maneuver. The country isn’t in a rush to roll out massive interest rate cuts or quantitative easing measures, but banks’ reserve requirement ratio’s can be cut further. US Treasury Secretary Mnuchin confirmed high-level trade talks with Chinese VP Liu He in Washington in the week beginning October 7. Today’s eco calendar contains German Ifo investor sentiment, US housing data, Richmond Fed Manufacturing index and consumer confidence. The September Ifo release will probably disappoint like PMI’s did yesterday. It could add to Bund’s outperformance while keeping EUR/USD in the lower half of the 1.0926-1.1112 trading range. Regarding US data, we especially eye consumer confidence. Consensus expects a small setback (133 from 135.1). Industrial weakness spreading to the US consumer would be a cue for the Fed to engage to additional rate cuts. So far, it hasn’t really been the case.
EUR/GBP ended slightly higher yesterday (0.8844 from 0.8828). UK Labour leader Corbyn won backing for his wait-and-see policy on Brexit after the opposition party voted down a proposal to “energetically campaign” for a stay in the EU at the party conference in Brighton. The priority will now be to secure a second referendum and then decide how to campaign on the issue once that’s done. UK PM Johnson said in the sidelines of the UN Summit in NY not to expect any Brexit progress this week. Attention turns to the US Supreme Court’s decision on the legality of the Parliament’s prorogation today. We hold our view that sufficient good news is discounted in sterling at current levels and given the Brexit stalemate.
News Headlines
US deputy Treasury Secretary Muzinich announced yesterday that from early next year the Treasury will publicly release data on US government bond trading volumes. The Financial Industry Regulatory Authority will on a weekly basis publish data broken down by security type, maturity and the market segment where the trade took place. The Treasury has opted not to release specific price information.
German Chancellor Merkel, French President Macron and UK PM Johnson issued a joint statement, blaming Iran for the drone attack on Saudi oil infrastructure. They want fresh talks on a new, long-term agreement dealing with Iran’s nuclear, regional and missile activities. The statement marks a significant shift on Iran but falls short of backing Washington’s demands for a new agreement. Europe also isn’t following the US example of tightening economic pressure on Iran.
