Markets
It was a bad day at the office for sterling. EUR/GBP closed at 0.9071, gaining one big figure with cable (GBP/USD) turning south of 1.30 for the first time since the end of July. Sterling’s Summer run had been remarkable by any means given looming threats from brexit, the mismanagement of the COVID-19 crisis and the Bank of England. Brexit is currently causing the damage. Chief brexit negotiators Barnier and Frost are back at it again this week, but previous negotiation rounds ended in tears. Talks are now overshadowed by the UK government’s intention to publish a new bill today that will override last year’s signed withdrawal agreement if no trade deal between the EU and the UK is agreed by the end of this year. The deadline probably is even sharper (EU Summit of October 15) given that any trade deal should pass national EU parliaments. The change to the withdrawal agreement would relate to future trade between the UK and Northern Ireland, removing the requirement for export declarations and a provision to provide details on state subsidies for firms in Northern Ireland. UK PM Johnson’s gamble risks backfiring as the EU won’t give in to such blackmailing exercise and with the UK losing its status as a reliable partner in e.g. future trade discussion (US). With the prospect of a hard brexit again looming large, markets adapted expectations for the Bank of England’s future policy. UK yields fell by 4.1 bps (2-yr) to 7.8 bps (30-yr) with UK yields now negative for tenors up to 6 years. BoE governor Bailey confirmed recently at the virtual Jackson Hole conference that negative policy rates remain an option. The central bank meets next on September 17, but the November 5 policy meeting is probably the crucial one. Sterling has much more downside if markets really start discounting negative rates in the short run. From a technical point of view, EUR/GBP 0.9176/0.9184 (June top/62% retracement of March-April sterling recovery) is first resistance.
It was an even worse day at the office for (US) stock markets. The tech-heavy Nasdaq continued correcting, ending at the intraday low and down over 4%. The S&P 500 and Dow Jones ceded around 2.5%. The global risk-off environment and falling oil prices (Brent crude < $40/b) pulled yields lower despite yesterday’s start of the mid-month US refinancing operation (weak $50bn 3-yr Note sale). The US yield curve bull flattened with yields falling by 0.2 bps to 5.1 bps. The German yield curve moved in similar fashion, losing 0.6 bps to 3.8 bps. 10-yr yield spreads vs Germany barely moved with Greece (+5 bps) underperforming. The risk-off environment benefited the dollar, but not to a great extent. The trade-weighted greenback remains well below first resistance at 93.99. EUR/USD tests minor support at 1.1754, but we hold our view that we might end up with a stronger euro after tomorrow’s ECB meeting. Today’s eco calendar is empty apart from US ($35bn 10-yr Notes) and German (€4bn 2030 Bonds) supply, suggesting that yesterday’s trading dynamics will remain at play. The 10- and 30-yr (tomorrow) US auctions might nevertheless cap the upside of US Treasuries.
News Headlines
AstraZeneca announced it has paused global trials, including late-stage trials, of its experimental coronavirus vaccine because of an unexplained illness of a study participant. The vaccine, developed with the University of Oxford, has been widely seen as one of the leading global candidates against the coronavirus. The suspension of the trial might delay the rollout. In this respect it might also weigh on global market sentiment.
Chinese annual producer prices in August declined for the seventh consecutive month. PPI printed at -2.0% Y/Y. However, the pace of the decline slowed, a potential indication of the economy further recovering from the corona crisis. Consumer price inflation eased from 2.7% Y/Y 2.4% Y/Y, in line with expectations. The decline in headline inflation was supported by slower food prices growth to due declining pork price inflation. Core inflation still rose only 0.5% compared to the same month last year.
