- European equities recovered partially from initial losses as risk off sentiment eased without disappearing completely (equities about 0.3% lower). Gold moved sideways after opening higher, while the yen is off its intra-day highs. Bonds are little changed and so is EUR/USD.
- The nuclear test by North Korea and its potential geopolitical effects dominated trading. The absence of US traders and the dearth of the market calendar kept trading flows very thin.
- China’s central bank said initial coin offerings illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales. It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies.
- Steven Mnuchin is embracing the idea of not letting a serious crisis go to waste and that could be good news for Treasury bill holders. With the federal government’s funding headroom dwindling by the day and rates on some vulnerable short-term securities climbing, the Treasury Secretary is pushing to wrap together a U.S. debt ceiling increase with the government’s Hurricane Harvey aid package
- Norway’s sovereign wealth fund proposed sweeping changes to its $333 billion bond portfolio, including dropping the Japanese yen, emerging markets and corporate bonds, as it beefs up on liquidity amid an expansion of its stock holdings. It proposes to diminish its bond index from 23 currencies to only include dollar, euro and pound.
Rates
German Bunds in limbo
Trading was dull today, as US markets were closed and the eco calendar nearly empty. Attention turned to the North Korean test of a powerful H-bomb and on the upcoming ECB meeting. The North Korean nuclear test triggered demand for haven assets in Asia. The Bund opened consequently higher but couldn’t capitalize enough to trigger a directional rally. Equities opened much lower, but immediately climbed higher after the opening, easing part of the initial losses. The Bund future traded sideways in a 25 tick range with most activity linked to the contract rollover. Gold traded sideways, safeguarding overnight gains. The yen is off its strongest overnight levels. Concluding: bonds are barely impacted by the risk-off sentiment that eased, but didn’t completely disappear. Traders want to verify how US markets will react to the geopolitical crisis.
In a daily perspective, German yields drop up to 1 bp the curve. across The 30-yr yield lags (flat). The modest easing of the risk aversion translated in a 2-to-3 bps spread widening for Spain and Italy (10-yr), while the Portuguese spread fell 1 bp. Moody’s upgrade the outlook of the Portuguese Ba1-rating had little effect. Spain and Italy outperformed despite fresh supply later this week.
Currencies
Dollar marginally softer on Korea uncertainty.
The tensions on the Korean peninsula was the only driver for global FX trading as there were no important eco data and as US investors were absent in observance of the Labour Day Holiday. The dollar was slightly in the defensive, but reversed most of the intraday setback as the immediate impact of the events in Korea eased during the day.
During the weekend, geopolitical risk returned to the forefront as North Korea tested a new nuclear bomb on Sunday. Major regional equity indices lost about 1%. China outperformed. USD/JPY opened sharply lower in the 109.25 area, but the pair already returned to the 109.75 before the open of the European markets. The North Korea tensions had little impact on EUR/USD. The cross rate held very tight range near the 1.1880 level.
The tensions around North Korea also caused a risk-off repositioning at the start of European dealings, as there was no other news with market moving potential. European equities opened with substantial losses, core yields declined marginally and the dollar lost a few ticks. EUR/USD rebounded to the 1.1922 area. USD/JPY dropped from the 109.80 area to fill bids at around 109.40. However, the market reaction function to the issue was quite similar to what happened of late. The impact of the ‘North Korea event risk’ soon lost its grip on global price action. The dollar decline didn’t go far and the dollar gradually reversed most of the early session losses. With US market closed in observance of the labour day holiday, interest rate differentials had no role to play as a driver for FX trading. EUR/USD trades currently around 1.19. USD/JPY is changing hands in the 109.70 area. For now, Korea remains a secondary issue for global (Fx) trading, but we still want confirmation from the US tomorrow.
EUR/GBP hovers listless around
Sterling traders experienced a dull , uneventful trading session today. The UK currency traded slightly softer this morning as the overall risk-off sentiment weighed slightly more on sterling than on the dollar and the euro. The UK construction PMI (51.1) also showed a further loss of momentum. However, both the moves in cable and in EUR/GBP were technically insignificant. EUR/GBP returned temporary to the 0.9218 area, but trades currently again below 0.92. Cable trades around 1.2950. For now, sterling feels no additional headlines from the stalemate in the Brexit negotiations.
