Markets:
European markets entered calmer waters after yesterday’s risk-off correction due to awful EMU September PMI’s. German IFO business confidence painted a tentatively less negative picture compared to yesterday’s PMI’s. The business climate index (94.6 from 94.3) and the current condition assessment (98.5 from 97.4) improved more than expected, but the important expectations index still declined (90.8 from 91.3). Any gains in the euro and/or European yields were very limited and temporary. The UK court ruling against the suspension of Parliament can also be considered as mildly positive for Europe/European risk assets, but it wasn’t enough to trigger a trend move yet. European equity indices hover near yesterday’s closing levels. US equites show modest gains as US officials confirmed new high-level US-China trade talks early next month. Even so, the US yield curve bull flattened with yields declining between 1 bp (2-y) and 3 bps 30-y. The Fed’s liquidity operations probably supported US Treasuries. Changes in German Bund yields are smaller than one bp. 10-y intra-EMU spreads vs Germany are still little affected by the uncertain economic picture (changes of less than 2 bps). On the FX markets, EUR/USD gained a few ticks (after the UK Court ruling), but it is still far from sure that the pair will be able to close north of 1.10. USD/JPY hovers in a tight range in the upper half of the 107 big figure.
The UK Supreme Court this morning ruled UK PM’s Johnson’s decision to suspend Parliament as ‘unlawful’. The ruling of the Court was unanimous. It considered the decision as ‘unlawful as it had the effect of frustrating/preventing the ability of parliament to carry out its constitutional functions with reasonable justification’. Parliament will resume its activity on Wednesday. Several politicians of the opposition already called Johnson to resign. Sterling jumped higher immediately after the announcement of the Court decision. EUR/GBP moved to the 0.88 level as the outcome is seen as providing parliament with more leverage to prevent a no deal scenario. In a first reaction, PM Johnson said he disagreed with decision but that he respects the juridical process. Even so, next steps in the Brexit process remain highly uncertain. Markets apparently want more insight in the next concrete steps of the Brexit negotiations before engaging in further GBP-long exposure. EUR/GBP trades currently in the low 0.88 area. Cable again nears the 1.25 big figure.
News Headlines:
Belgium business confidence rose for the first time in six months, from -5.8 to -5.7, though less than expected (-5.5). Improving sentiment in the services (5.1) and construction (3.5) industries outweighed the worst reading in manufacturing (-10.1) in more than 3 years. Trade confidence fell to -8.1, led by a deterioration of demand forecasts. Last week, Belgian consumer confidence declined from -9 to -11, a 3-yr low.
The NY Fed conducted its 1st of 3 14-day repo operations. They allotted the maximum amount put forward ($30bn), but dealers submitted more than twice as much securities ($62bn). The 2-week operations need to stem liquidity concerns over the quarter end. The overnight repo operation drew about $80bn of assets, slightly exceeding the $75bn of liquidity the NY Fed put on offer.
The Hungarian central bank kept its policy rate (0.9%) and deposit rate (-0.05%) unchanged. In a statement released after the meeting, the MNB indicated that previously symmetric risks to inflation became asymmetric. The downside inflation risks have strengthened further, reflecting the effects of the slowdown in EU economic growth. The Hungarian forint lost more ground today with EUR/HUF setting a fresh all-time high north around 336.
