Markets
Markets end a volatile week with a bang. Trump’s comments yesterday, hailing constructive trade talks and announcing he’ll meet with Chinese VP Liu he, echoed through markets today and brushed aside any geopolitical risks in the Gulf area. Markets increasingly anticipate some kind of a (partial) deal that would introduce a temporary trade truce while the thorny issues (such as intellectual property) are kicked down the road. At the same time, a potential breakthrough in Brexit (see below) adds to the positive risk climate. EU stocks rise up to 2% (Germany). US equities eke out a +1% gain ahead of a long weekend (Columbus Day on Monday). The US yield curve shifts north with the belly (+5.5 bps) underperforming the wings (+4 bps). The German curve bear steepens with yield changes varying from -0.4 bps (2y) to 3.5 bps (30y). Peripheral yields narrow 2 bps (Spain, Greece, Portugal). Italy (-5bps) outperforms after having successfully tapped the bond market (3y, 7y, 20y and 30y). Longer tenors, still offering some yield, proved particularly popular among investors: bid/cover ratios increased along with maturities. EUR/USD confirms yesterday’s break on the upside of the downward trend channel today. The currency pair is changing hands in the 1.105/6 area (intermediate resistance). We keep a close eye at 1.11 next. USD/JPY swiftly pushes through 108 and is testing recent highs near 108.5.
Sterling initially held on to yesterday’s impressive gains following “constructive” and “promising” talks between Irish PM Varadkar and UK PM Johnson. The British pound surged again during European trading hours however. The move came after European Council president Tusk received “optimistic messages” that a deal with the UK could be done. Rumour has it that Johnson compromised on keeping Northern Ireland within a customs union with EU. Sterling buying and/or unwinding of sterling shorts accelerated even further on reports that EU’s chief negotiator Barnier received a go from the EU member states for “tunnel negotiations” with the UK. Tunnel negotiations are discussions held in complete secrecy with no press briefings and usually take place to discuss the details of a (Brexit?!)deal. The intensive talks will be held in the coming days, ahead of the crucial EU summit on October 17-18. Markets now clearly expect the EU and UK will be able to trash out an agreement. Sterling crushed the EUR/GBP 0.8798 (61.8% retracement) support and is currently changing hands at 0.874. Less than two days ago the pair traded at 0.90! Cable is steaming ahead on the burst of Brexit optimism similarly. GBP/USD is filling bids in the 1.264 area vs. 1.244 at the open (and 1.22 on Wednesday).
News Headlines
The International Energy Agency (IEA) in its monthly report said that oil markets in September withstood a large scale-supply disruption. The situation was labeled ‘business as usual’. The agency trimmed its forecasts for demand this and next year. Fear for an economic slowdown might still result in over-supply.
ECB present Draghi again defended the bank’s September decision to add substantial stimulus. The decision met high profile criticism inside and outside the ECB. The ECB president advocated alignment between governments and central bankers to support the economy. “Central bank independence is not an end in itself,” and it “does not preclude communication with governments when it is clear that mutually aligned policies would deliver a faster return to price stability”, the ECB president was quoted.
The Canadian economy added a 53.700 net jobs in September, substantially more than expected. Gains mostly came from the services sector. The unemployment rate unexpectedly declined from 5.7% to 5.5%. Hourly wage growth for permanent employees accelerated to 4.3% from 3.8%. The data confirm the Bank of Canada assessment of a strong labour market. USD/CAD declined from the 1.3290 area to the low 1.32 area.
