Markets
Financial markets were again struggling for direction yesterday. Except for the decent US housing data, there was little data scheduled for release. Other global news stayed limited to the IMF head outlining a glooming economic picture and urging countries to use the fiscal and monetary space at hand. A speech from NY Fed Williams defending a preemptive approach went largely unnoticed. Stock markets treaded water as investors are looking for confirmation of a trade deal being signed. The US yield curve bull flattened with changes varying from -0.3 (2-yr) to -4.8 bps (30-yr). German yields were virtually unchanged. Peripheral spreads widened marginally with Spain (+3 bps) and Italy (+4 bps) underperforming. EUR/USD performed not too bad given the sensitive risk environment. The couple hovered near recent highs in tight sideways range, closing at 1.1078 (up from 1.1072). The Japanese yen eked out small gains. USD/JPY ended at 108.54, down from 108.68. Sterling took a breather. EUR/GBP increased to 0.857 (from 0.855). Labour performing better and narrowing the gap with the Conservative Party in a recent poll was likely the reason.
China cut its new 1-yr and 5-yr benchmark rates with 5 bps in another move to support the economy. Overnight market moves are dominated by the US Senate approving the Hong Kong Bill however. The House passed a similar bill earlier. The legislation voices US support for Hong Kong protesters and includes – among other things – sanctions on Hong Kong officials. China threatened to retaliate with unspecified measures if the bill gets law. The move unnerves markets and adds another layer of uncertainty around the partial trade deal. US VP Pence said yesterday it would be difficult to find a (trade) agreement with China if the HK protests are met with violence. Asian stocks slip, core bonds jump higher. EUR/USD is less affected as the trade theme continues to be ambiguous for the pair. USD/JPY stabilises near yesterday’s close as poor Japanese trade data hinder the yen from profiting from the risk-off.
Today’s economic calendar eyes extremely meagre. The Fed minutes are worth watching but we don’t expect them to provide much impetus. They will most likely confirm broad support for the Fed’s wait-and-see mode. Risk sentiment is thus poised to be in the driver’s seat again today. The overnight developments have complicated the signing of a trade deal and will probably echo through European and US dealings. We expect a fertile environment for core bonds with UST’s possibly outperforming the German Bund. Narrower US/EMU interest rate differentials and a more neutral technical picture might keep the downside of EUR/USD protected. We don’t assume a big leap higher in the run up to Friday’s European PMI’s though.
News Headlines
The near US-China trade deal that fell apart in May is now being used as the reference point to decide how much tariffs should be rolled back in the initial phase of a broader trade agreement, Bloomberg reported. According to sources, tariff rollbacks which vary between 35% and 60%. The Chinese are demanding all levies imposed after May to be lifted immediately and those before to be phased out gradually.
The Chinese central bank cut its new benchmark lending rate today by 5 bps to 4.15% from 4.20%. The PBOC is continuing to press down lending rates steadily and incrementally. The central bank aims to drive down funding costs and shore up an economy hurt by slowing demand and waves of tit-for-tat tariffs.
Japan’s exports suffered their largest drop in three years in October and fell 9.2% from a year ago, a bigger decline than the 7.5% forecast. The trade-reliant economy continues to be hit by the dragging US-China trade war and extreme weather disrupted output at home. Exports to China and the US, Japan’s two biggest markets, logged double-digit falls. Imports fell slightly milder than anticipated in October (14.8%, consensus at 15.2%) yet remain very weak, reflecting depressed demand.
