- European equity indices (+1%) and US stock-index futures rallied as investors sought risk assets after a feared missile launch from North Korea never materialized and Irma was downgraded. Treasuries, gold and the yen dropped.
- ECB Coeuré said that the exchange rate doesn’t weigh on growth the way it once did, offering some comfort to those worried about whether a strong currency would undermine the eurozone’s growth outlook.
- Euro bulls, who have a pretty good year so far, are positioning for further gains, with long bets sitting at their highest level in six years. Speculators were holding the biggest net long position on the euro against the dollar since May 2011 ahead of last week’s ECB meeting, according to data from the US Commodity Futures Trading Commission.
- Britain faces a chaotic exit from the EU if lawmakers vote against legislation designed to sever political, financial and legal ties with the bloc, Britain’s Brexit minister David Davis said before a key parliamentary vote.
- China is reversing a range of measures it had put in place to support its currency, a response to a recent surge in the value of the yuan that has hurt Chinese exporters and added to the country’s economic headwinds. Starting today, the PBoC scraps a two-year-old rule that made it more expensive for traders to bet the yuan will fall in value.
Rates
US yields retest lost support
Global core bonds lost ground today. The majority of the losses occurred in the opening, though the decline accelerates at the start of US dealings following a sideways European session. Investors were anxious ahead of the weekend because of uncertainty surrounding North Korea (ICBM test on founding day?) and hurricane Irma. The worst case scenario was twice avoided, triggering a turn in risk sentiment. Second tier eco calendars on both sides of the Atlantic played no role. ECB Coeure said that ECB policy will remain accommodative for longer than in previous cases of demand shocks, likely limiting the negative impact of the euro’s appreciation. His comments suggest that the ECB isn’t too worried about the rise of the euro (go ahead for policy normalisation), but markets didn’t react. Upcoming US supply weighted on US Treasuries as well. The US Treasury starts its mid-month refinancing operation tonight with a $24B 3-yr Note auction. Currently, the WI trades around 1.43%. The auction is followed by a $20B 10-yr Note auction tomorrow and a $12B 30-yr Bond auction on Wednesday.
At the time of writing, US yields increase by 4 bps (2-yr) to 6.6 bps (10-yr). The US 30-yr yield trades back above last week’s broken support (2.68%) while the US 5-yr yield (1.7%) and US 10-yr (2.1%) are currently testing similar levels. A rebreak would imply that we’ve entered a sort of consolidation phase near the current lows. The German yield curve bear steepens with yields 1.2 bps (2-yr) to 2.7 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes range between -1 bp and +1 bp.
Currencies
Dollar rebounds. USD/JPY takes the lead
Investors left their defensive bias from the end last week as the damage of hurricane Irma might be less than feared. Core/USD yields and the dollar reversed a small part of last week’s slide. However, the (technical) picture hasn’t changed in any profound way. Recent lows of the dollar remain nearby. EUR/USD tries to return below the 1.20 barrier. USD/JPY is changing hands in the 108.85 area.
Risk sentiment improved materially in Asia this morning. The damage of Hurricane Irma is very substantial, but markets assume that the impact on the US economy is manageable. The tensions between the US and North Korea are not out of the way, but the impact on markets ebbed away. US bond yields opened higher, easing some pressure on the dollar after last week’s sell-off. USD/JPY returned north of 108. The gains of the dollar against the euro were modest with EUR/USD trading in the low 1.20 area.
European markets joined the global post-weekend equity rebound. However, the impact on core bonds and on the dollar remained limited. ECB’s Coeure elaborated on the value of the euro. He sees the recent rise as no immediate source of concern as it is supported by a recovery in domestic demand. At the same time, he warned that a rise of the euro due to an exogenous shocks could lead to an unwarranted tightening of momentary conditions. The reaction of the euro to Coeure’s comments was negligible. EUR/USD held a tight intraday range close to, mostly just north of 1.20. The yield differential between the dollar and the euro widened at the open but stabilized soon. USD/JPY also didn’t make further progress despite the overall positive risk sentiment.
US yields and the dollar tried to extend their rise at the start of US trading. EUR/USD initially struggled to break below 1.20, but trades currently in the 1.1975 area. USD/JPY made some further headway and trades at around 108.85. The dollar moves a bit further away from last week’s lows, but it’s too early to cry victory on a USD comeback. The extremes in USD/JPY and in particular in EUR/USD remain within reach if the newsflow would again turn USD-negative.
GBP well bid as BoE meeting looms
Since end August, sterling succeeded a good rebound against the euro and the dollar. This trend continued. Admittedly, additional sterling gains were modest today. The debate on the UK Brexit law continues, but provided little impetus for sterling. Later this week, the focus for sterling trading might gradually turn to the UK eco data (including the CPI tomorrow and labour market data on Wednesday) and the BoE policy decision on Thursday. Prepositioning on a slightly less dovish BoE perhaps kept sterling well bid. EUR/GBP trades in the 0.9080 area. Cable hovers near the 1.32 big figure.
