Markets
Risk sentiment turned less sour in Asia this morning. Most indices still recorded losses of up to 1% though with Japan underperforming (-2%) and China still closed for National Holidays. Main European indices opened near yesterday’s lows and hovered listless around those levels in the run-up to today’s key non-manufacturing ISM. Several ECB members took stage and aligned with the meanwhile common view that there are limits to the ECB’s capacity to boost growth (ECB Rehn). Vice-President de Guindos talked about disappointing growth with risks for the outlook tilted to the downside. He agrees that fiscal policy must play a part in supporting the economy. Voting Chicago Fed governor Evans delivered some interesting comments in a Bloomberg interview. He’s the first one to say to be open-minded going into the October meeting: “the question is how accommodative we need to be. At the moment it’s still risk management”. He still believes that the growth outlook is pretty good, but warns about several uncertainties and possible shocks that come the US way. The market implied probability of a third consecutive rate cut in October increased over the past days to nearly 70%! The chance of at least one cut by the end of the year exceeds 90%. US yields declined by 1.5 bps to 2 bps across the curve ahead of the non-manufacturing ISM. German Bund slightly outperformed with the curve bull flattening ahead of the ISM (2y: -1.4 bps; 30y: -3.8 bps). 10-yr yield spread changes vs Germany are broadly unchanged with Italy outperforming (-3 bps) and Greece underperforming (-4 bps). EUR/USD traded choppy around the 1.0960 opening mark ahead of the ISM.
The US non-manufacturing ISM declined more than expected in September with the indicator dropping from 56.4 to 52.6 (vs. 55.0 anticipated). New orders (53.7) dropped significantly but that comes after a strong increase last month. Employment is disappointing, barely holding ground above the 50 boom/bust mark (50.3). The US dollar (EUR/USD 1.0990) and US stock markets are under pressure (-1%) at the time of writing with US Treasuries profiting (US 10-yr yield down 9 bps).
Sterling gained the upper hand today on talk that rival factions within the Conservative party are backing UK PM Johnson’s updated Brexit proposal, giving him a glimpse of hope of getting parliamentary approval. However, we’d remain cautious as the proposal, including customs check on the Irish island, doesn’t seem to get the backing of the EU. The Times reported this morning that they are preparing emergency measures by the end of October to make sure the Brexit deadline will be extended if necessary. The UK services PMI fell more than expected, from 50.6 to 49.5. The key domestic industry drops into contraction territory for the second time this year (March), but UK markets remain unmoved.
News Headlines
After printing dire manufacturing PMI’s earlier this week (46.3 from 52.4), Sweden’s business optimism in the services sector also slumped in September. The indicator fell more than 4 (!) points from 54.2 to 49.8. Losses for the Swedish krona were very modest however: EUR/SEK added some 0.13% (from 10.82 to 10.84).
The EU court ruled in favour of mortgage holders in the case over foreign exchange loans granted by the Polish financial sector. However, the annulment of those contracts, which could come at large costs, requires a decision by local courts. The Polish zloty strengthened against the euro (EUR/PLN 4.335) as markets were braced for the worst.
The EU economic commissioner-designate Gentiloni said he will seek for ways to counter (risks of) an economic slowdown with “adequate” fiscal measures. During his confirmation hearing before EU parliament, the former Italian PM said he would use the leeway granted by the fiscal rules to allow governments to invest for growth.
