Markets
Markets still tried to assess the meaning yesterday’s poor US manufacturing ISM today. The trade crisis has pushed the US production sector to the hedge of a recession. Will it also affect domestic activity that is less exposed to international trade and slow job creation? Yesterday, US yields nosedived as markets considered it almost ‘inevitable’ that the Fed will again come to rescue later this year. This morning, there were few data in Europe. European yields yesterday and this morning reversed part of the post-ISM decline and stayed off recent bottom levels. The rise/rebound in US yields was much more modest and US bonds again received a better bid as US traders entered at their desks. The US ADP labour market report was the first past-ISM reality check for global (bond) markets. According to ADP, the US private sector added net 135 000 jobs in September (close to expectations), but the August figure was downwardly revised to 157 000 from 195 000. The US 10-y Note future tested yesterday’s correction top at the time of the publication of the ADP report, but there were no follow-through gains. At the time of writing, the US yield curve bull steepens with the 2-y yield declining 4 bp and the 30-y easing 1bp. German Bunds still underperform as was the case yesterday with the curve bear steepening. The 2-y German yield is little changed. The 30-y yield gains 2.5 bp. The rise in (German) yields is remarkable as European and US equities remain under quite heavy selling pressure as uncertainty on global growth intensifies.
The dollar declined yesterday after the disappointing manufacturing ISM. However, especially the rise of EUR/USD was unconvincing as recent eco data indicated that EMU growth is nearing a standstill too. The USD decline was more outspoken in the likes of USD/JPY. This trading pattern continued today. USD/JPY regained a few ticks this morning, but soon turned back south. A global risk-off sentiment and growing doubts on the US economic performance are pushing USD/JPY to the mid 107 area. The pair traded in the 108.45 area before the publication of the US ISM yesterday. The dollar this morning regained modest ground against the euro, but overall USD-softness during the US trading hours propelled EUR/USD back up to the 1.0940 area.
UK PM Johnson at the Conservative Party’s annual congress in Manchester said he will make the EU a constructive and reasonable proposal on Brexit. At the same time, the UK PM reiterated said that the only alternative would be a no-deal Brexit. However, the details of his proposal remain vague and EU sources raised serious doubts whether they could be the basis for an agreement. Sterling showed no clear directional reaction after the speech. The way to a solution for Brexit, if any, remains as misty as it was before. EUR/GBP is drifting sideways in a rather tight range close to, mostly slightly north of 0.89. Cable (1.2275 area) regained some modest ground intraday, but this was mainly USD softness.
News Headlines
Germany’s economic institutes said that growth in the third quarter was likely to be negative. They have cut growth forecasts for this year from 0.8% to 0.5% and from 1.8% to 1.1% for 2020 as trade and Brexit are weighing on the industry. In their report, the institutes also called on Berlin to abandon its “black zero” budget policy if the “economic downturn turns out to be more significant”.
Portugal’s ruling Socialists maintain their lead ahead of elections taking place this Sunday, a poll showed today. However, PM Costa’s center-left party remains short of a majority (37%). The main opposition Social Democrats would win some 30% of the votes.
