- European stock markets trade mixed amid an empty eco calendar. US stock markets lose marginally ground in the opening. After heavy declines in USD and US rates, some calm returned today cross-markets.
- The UK’s manufacturing sector (+0.5% M/M) started the third quarter on a stronger footing after falling into contraction earlier in the year, but overall growth in industrial output (+0.2%) remained sluggish despite consistently optimistic confidence surveys.
- Possibilities discussed by the ECB at yesterday’s policy meeting on the future of APP included – but are not limited to – cutting monthly assets buys from €60 bn now to €40 bn or €20 bn from the start of next year, with extension options including 6 months or 9 months, said sources, who asked not to be named.
- China posted stronger-than-expected import growth in August, reinforcing views that the world’s second-largest economy is still expanding at a healthy pace despite tighter policy. China’s imports grew 13.3% Y/Y. Exports showed signs of softening, however, with growth cooling to 5.5% Y/Y.
- Canada added more jobs than expected last month (+22.2k) and the country’s unemployment rate fell to the lowest level since 2008 (6.2%) in the latest sign of the economic recovery. Details showed though that 88.1K full time jobs were lost, while 110.k part time jobs were created. The Canadian dollar didn’t react.
Rates
Core bonds lose slightly ground in dull session
The Bund and US Treasuries lost slightly ground following strong gains on Thursday and a good opening today. Eco data were few and uneventful. A "sources" article on the ECB suggested that 4 specific options were presented to the ECB governors yesterday on the tapering of the APP programme. It suggests that the ECB discussion went further than Draghi admitted. While as such that isn’t big news, it might have been the trigger for a mild profit taking, especially after the Bund (and the US T-Note future) set a new high at the start of trading. The Bund correction came in late morning session, while the T-Note’s dive occurred when US traders got involved. The correction was too all standards minor.
At the time of writing, US yields rise by 0.5 to 1.5 bps. German yields are 0.1 bp to 2 bps higher. Spanish and Italian bonds underperformed, maybe due to the Catalonian problem or due to the "source" article.
Sources suggested that ECB-policymakers were presented four options for the APP programme in 2018 that kept the programme within the existing parameters (issue/issuer limits). The options included, but were not limited to reducing the monthly purchase target to 40 or 20 B euros with extension options including 6 and 9 months. This is more specific that the reference of Mario Draghi that discussions were about the length and size of the monthly flows. ECB Weidmann said that one reason why the council decided to wait for now is uncertainty over the path of inflation, but he warned that officials should not miss the right moment to act.
Currencies
EUR/USD rallies even as Draghi brings no news
FX investors are still searching for the right strategy to avoid event risk this weekend or in the near future. The dollar remains more sensitive t than the yen or the euro. EUR/USD set a new correction low in the high 1.20 area early this morning. The rally stalled, but there is no sign of any meaningful correction. EUR/USD trades near 1.2050. USD/JPY remains below the key 108.13 area (currently 107.75). So, the USD alerts are still flickering.
This morning, Asian equities traded mixed with China again outperforming. Japanese Q2 GDP growth was downgraded more than expected from 4.0% to 2.5% Q/Qa. However, it didn’t stop the rise of the yen. USD/JPY already dropped below 108.13 support before the European market opening. EUR/USD filled offers in the 1.2090 area, but upward pressure eased slightly as European traders entered. EUR/USD settled near the 1.2070 recent top.
The euro rally took a breather during the European morning session. The pair settled in an 1.2035/75 consolidation pattern. However, there was no indication at all that a meaningful correction was imminent. Changes in interest rate differentials between the euro and the dollar were again limited. IF anything they developed in favour of the euro. Other major dollar cross rates also indicated an ongoing uphill battle for the US currency. Interesting, European equities hardly suffered from the latest euro strength/dollar decline.
There were no important data in the US. Investors didn’t want to place any big directional bets and basically try to avoid potential event risk (North Korea, bickering in Washington, economic and market impact of the hurricanes). Core bond yields rose marginally off the recent lows and the dollar shows tentative signs of an intraday bottoming process. However, the broader picture hasn’t change. Dollar sentiment remains fragile and any negative news (from whatever origin) might put the US currency again under pressure. EUR/USD trades in the 1.2050 area. USD/JPY is changing hands in the 107.75 area.
EUR/GBP resists global euro rebound
There were again plenty of headlines on the stalemate in the Brexit negotiations and the UK eco data calendar was well filled. However, those topics played no important role in sterling trading. The rise of the euro took a breather early in Europe. EUR/GBP also declined from the 0.92 area to the 0.9160 area. The UK production data printed strong than expected and the trade deficit was smaller than forecast. Construction output missed consensus. We didn’t see a direct impact on sterling trading. Even so, sterling bulls might find some indications of sterling resilience in today’s price action. Sterling evidently extended gains against a bleeding dollar. Even more, EUR/GBP also resisted the overall strong bid in the euro. The pair even returned back to yesterday’s pre-Draghi low. The jury is still out, but for now, sterling shows good resilience in an overall very uncertain context.
