Markets
Global sentiment was rather mixed at the start of today’s trading. Hong Kong leader Lam’s speech got interrupted by protesters, Brexit optimism faded somewhat and US/Sino (non-trade related) tensions flared up. The US House approved a bill supporting HK protesters, much against the will of China. The latter threatened with retaliation if the US bill would pass Congress. Things got a little better during early European dealings though. Germany’s CDU is said to soften its opposition against fiscal stimulus if GDP growth takes a hit. Q3 figures are due November 14. The mood surrounding Brexit also improved. Although today’s headlines were again very conflicting, markets still believe a deal in the short run is possible. Soft US retail data leaved most traces on US markets. US stocks underperform European equities while UST’s outperform German Bunds. The US yield curve bull steepens as yields change some -2.2bps (2-yr) to -1.4bps (10-yr). German yields rise 1 bp (2-yr) to 2 bps (10-yr). Spreads with the European periphery narrow with Italy (-5 bps) outperforming. EUR/USD choppy pattern on German stimulus reports and Brexit headlines (similar to its sterling counterpart). The couple ekes out some small gains, trading in the 1.105 area at the moment. USD/JPY retraces some of yesterday’s surge but it still holding well above 108 (108.70).
Yesterday’s Brexit optimism faded somewhat this morning after the DUP expressed concerns on the deal PM Johnson is forging with the EU. EUR/GBP touched 0.87 (up from 0.865) twice on reports that UK government saw chances of a deal to be low and after the EU said an agreement is impossible unless the UK moves. It highlighted that although much progress has been made, there’s still work to be done. Sterling briefly surged to an intraday high at EUR/GBP 0.86. The DUP had accepted Boris Johnson’s latest proposals, Ireland’s RTE reported, citing EU sources. DUP head Arlene Foster was quick to dismiss the news as “nonsense” however, saying that discussions are ongoing. Sterling’s gains thus were only short-lived. EUR/GBP is eventually trading virtually unchanged currently compared to Wednesday’s close but had a wild ride of about 1 big figure in between. Cable, 1.278 at the time of writing, showed a similar trading pattern (swings from below 1.27 to above 1.28). Needless to say investors completely ignored September inflation data, which was close to expectations anyway. Markets literally reacting to every single Brexit headline popping on the screens is testament to the high amount of nervousness lingering as the deadline approaches. Market implied sterling volatility soared to levels not seen since the referendum in 2016 over the past few days and it is likely to stay elevated short term. At current pound levels markets still expect a deal between the UK and EU to happen soon, possibly at the EU summit starting tomorrow. Next to watch would then be a special parliamentary session on Saturday to push Brexit agreement through parliament.
News Headlines
US retail sales unexpectedly fell 0.3% (m/m) in September, posting their first decline in 7 months. The report raises fears that the manufacturing-led weakness is spreading to the main pillar of economic growth. Together with weaker business investment and a lingering trade war, cooling consumption could increase downside risk to the US economy. This could potentially bolster the case for a third interest-rate cut by the Fed.
September eurozone headline final inflation dropped to 0.8% (y/y) from 1% (y/y) in August, its lowest level since November 2016. Final core inflation ended up at 1% (y/y). Overall, underlying price pressure remains stubbornly subdued. Trade data for August shows that trade is dragging on the eurozone economy. Exports fell 2.2% (y/y) in August while imports dropped 4.1% (y/y).
This morning Bloomberg reported that Germany’s CDU would be ready to break its long-held commitment to its “Schwarze Null” policy if a downturn required a more powerful reaction to bolster the economy. However, in the afternoon Germany’s ruling party reiterated their position to uphold the balanced budget policy.
