Markets
The recent global risk rally lost further momentum today. The price pattern across different markets turned more diffuse/ less consistent. Stocks, both in the US and Europe, continue to test recent top levels , at least partially driven by corporate earnings. In Europe financials outperform. The economic news flow remained mixed. German September factory orders (1.3% m/m) and the final EMU (composite at 50.6 vs 50.2 for the for the preliminary reading) might signal a potential bottoming in the economic downturn or at least a less negative momentum than what was feared. EMU September retail sales also printed marginally stronger than expected. However, not everyone is convinced that the worst might be over for the EMU economy. The IMF in particular, continues to see elevated risks for an economic slump. The IMF calls Europe to prepare for though economic environment in which monetary policy will need the help of fiscal stimulus to prevent an sharp downturn materialize. US eco data were second tier. US Q3 productivity unexpectedly declined in Q3 (-0.3%Q/Q) causing a rise in unit labour costs. However, it wasn’t easy for (global/US) markets to draw any firm conclusions. Global core yields show a ‘corrective’ decline after recent rise with US Treasuries this time outperforming German Bunds. Investors want some more concrete signs that event risks like the US-China trade tensions (or Brexit) might indeed mitigate further down the road. The US yield curve bull flattens today with yields declining between 2 bp (2-y) and 3.5bp (30-y). German yields changed between +0.5bp (2-y) and -2.7bp (30-y). 10-y Intra-EMU spreads versus Germany are mostly little changed. Italy underperformed (+3bp) even as the Italian October PMI printed stronger than expected.
Trading in EUR/USD and USD/JPY was mostly technical in nature and confined to tight ranges. EUR/USD bottomed after extensively testing the 1.1175/65 support area. However, the move is unconvincing. For now, euro bulls apparently aren’t impressed by the ‘better’ EMU eco data or the, admittedly limited, daily ‘reversal’ in the USD-German interest rate differential. The USD/JPY risk rally is also stalling. The pair struggles not to fall back below the 109 handle.
The UK election campaign started officially but that wasn’t really visible in the sterling price action. EUR/GBP is still holding a tight sideways range in the low 0.86 area. For now, negative headlines on conservative party members/ministers didn’t leave much traces on sterling. Tomorrow, the BoE will announce its policy decision and publish a new inflation report.
News Headlines
US productivity unexpectedly declined in the third quarter of this year, printing at -0.3% q/q vs. 0.9% expected and down from a strong 2.5% in the previous quarter. While a slowdown/decline in productivity was “due” given the loss of momentum in the US economy, it does prompt questions whether the 2017 tax law changes aimed at boosting investments resulted in the expected productivity pick-up.
Poland’s Supreme Court said it will not consider any more demands from the ruling PiS party to recount the October 13 election results. Some PiS members have asked to do so after losing control of the Senate to the opposition in a tight vote.
South African president Ramaphosa secured some $13.5bn of investment pledges which he hopes will support the wailing economy. Ramaphosa’s announcement comes after his finance minister presented a widening budget deficit and rising debt last week which caused some rating agencies to downgrade country’s rating (outlook).
