HomeContributorsFundamental AnalysisSterling: Modest Profit Taking after Last Week's Rally

Sterling: Modest Profit Taking after Last Week’s Rally

  • European stock markets eke out modest gains in a quiet session, as risk sentiment brightened. Us equities open slightly higher.
  • The ECB should start discussing a broader range of measures as it seeks policy normalisation rather than just focus on how and when it will dial back stimulus, Governing Council member Hansson said in a Reuters interview.
  • Catalonia’s economy could shrink as much as 30% and unemployment double if it gains independence, according to the Spanish economy minister Luis de Guindos.
  • The annual rate of inflation in the euro area was confirmed at 1.5%. The ECB staff expects to see the headline inflation rate pull back to a low of 0.9% in the first quarter of 2018, as the consequence of negative (energy) base effects. Underlying inflation should not pull back sustainable.
  • The US military staged bombing drills with South Korea over the Korean peninsula and Russia and China began naval exercises ahead of a UN General Assembly meeting where North Korea’s nuclear threat is likely to loom large.

Rates

Core bonds resume correction lower

Core bonds hovered sideways during much of the session, no eco data nor other items figured on the calendar. During the afternoon session, core bonds slid suddenly lower, the Bund underperforming the US Treasuries. Trade volumes were very low. Today’s price action was uneventful, but signalled that the downward correction in core bonds is not over. We are a bit surprised by the market reaction in the afternoon, as the shadow of the FOMC looms and as neither the FX nor the equity markets showed moves of similar amplitude. We suspect the correction was technical inspired.

At the time of writing, changes on the US yield curve range between +1.1 bps (2-yr) and +1.6 bps (30-yr). The German yield curve trades 0.7 bps (2-yr) to 3.6 bps (10-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed across the board (4 bps for Italy and Spain). Portuguese bonds profited much more than other credits with a 29 bps narrowing versus Germany after S&P unexpectedly raised the country’s rating to investment grade (BBB-). The impact of the Irish rating upgrade by Moody’s (to A2) was less spectacular. The Irish 10-yr spread fell 1 bp versus flat for the semi-core bond yields.

The Belgian debt agency successfully started this week’s scheduled EMU bond supply. They tapped three OLO’s for a combined €3.5B, the maximum amount on offer: OLO 82 (€1.2B 0.5% Oct2024), OLO 81 (€1.28B 0.8% Jun2027) and OLO 73 (€1.02B 3% Jun2034). The auction bid cover was 1.71. Thank to these taps, the Belgian debt agency already completed over 90% (€32B) of its stated €35B target.

Currencies

USD lingers on in technical trading

USD trading was driven by technical considerations. There was little hard news to guide trading. The dollar continues to trade soft against the euro, but holds strong against the yen. EUR/USD trades in the 1.1960 area. USD/JPY is changing hands at around 111.45. EUR/JPY extends its break beyond the 132 previous resistance.

Overnight, Asian equities gained between 0.5% and 1.0%, supported by record closing levels on WS on Friday. Chinese house price increases slowed further in August, reducing the need for additional measures to cool house prices. This added to the Chinese risk-on sentiment. The yen held near recent lows with USD/JPY trading in the 111.15 area. EUR/USD traded in the 1.1940 area.

There was little high profile news to guide trading in core EMU FI and FX. EMU August CPI (1.5% Y/Y) was confirmed as expected. European markets joined the risk-on trade from WS on Friday and from Asia this morning. The combination of a positive risk sentiment and a marginally rise in core yields kept the yen under pressure. USD/JPY and EUR/JPY tried to extend gains. EUR/JPY tested last week’s top in the 133.10 area. The test initially failed. The subsequent decline of EUR/JPY also sent EUR/USD temporary back south. However, EUR/USD returned soon to the mid 1.19 area. USD/JPY drifted sideways in the lower half of the 111 big figure. Spreads on intra-EMU bond markets narrowed on positive credit news in some countries (e.g. Portugal). However, the impact on the euro, if any, was limited.

The dollar still showed no clear directional trend as US traders joined the fray. There were again several headlines indicating that relations between the US and North Korea remain tense. However, for now, the theme is more or less worked out as a driver for markets. At EUR/USD 1.1955 and USD/JPY 111.45, the dollar trades a bit soft against the euro, but remains strong against the yen.

Sterling: modest profit taking after last week’s rally

After a week of very strong gains on hawkish BoE talk, sterling finally fell prey to modest profit taking. We didn’t see a specific trigger. Overnight, Rightmove UK house prices were materially weaker than expected, but we doubt that these data were the real trigger. Investors holding sterling longs probably preferred to take some chips of the table ahead of an upcoming speech from BoE Carney and a key Brexit speech from UK PM May on Friday. EUR/GBP rebounded from the 0.8780 area to the 0.8835/40 area. This is a nice countermove, but it remains limited given last week’s impressive sterling gains. Cable also dropped off the 1.36+ correction top and trades currently in the mid 1.35 area

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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