- European equities trade flat to slightly higher in an uneventful session. US equities start trading with marginal gains.
- The German ZEW economic sentiment index improved in September with the current situation sub-index nearly matching the cycle high and the expectations component rising substantially. A rebound in equity prices was probably favourable. The results suggest the economy is near its peak, but no sign yet of a downturn.
- Italian banks already hit by billions of euros in losses on bad loans are moving on to what may be a trickier category of distressed debt as they seek to clean up their balance sheets, Bloomberg wrote. Now, attention focus to loans involving borrowers that are still going concern, but unlikely to meet their obligations.
- Norway’s oil fund, the world’s largest sovereign wealth fund, has topped $1tn for the first time in its history. In a country of just 5.2m people, the oil fund has been an extraordinary success, growing faster than ministers imagined to become one of the world’s largest investors, owning on average 1.3% of every listed company in the world.
- According to Reuters, ECB policy makers disagree on the fate of the bond programme. German and other northern countries are ready to wind down purchases, while others want to reduce the monthly pace of buying. Furthermore, a decision may be postponed to December and any end-date for purchases might not be set in stone.
- The Hungarian central bank cuts its overnight deposit rate by 10 basis points to -0.15% and leaves its benchmark 3-month deposit rate unchanged at 0.9% With the decision to cut, the NBH signals its readiness to counter downside inflation risks. It might also have eyed the (previous) strengthening of the HUF. EUR/HUF fell in a first reaction.
Rates
Core bonds in wait-and-see mode.
Another session of tight trading, but core bonds are nevertheless on their way to break a seven session losing streak, even as gains are very modest. Investors ignored the only eco data of importance, German ZEW economic sentiment. The ZEW survey suggests that the German economy continues to grow fast in September. Equities traded narrowly mixed, while gold stabilized after some losses in previous days. Crude oil tried to move up, but never went far and is now only marginally above opening levels. So, overall markets, including bond ones, traded quietly, with many investors side-lined ahead of tomorrow’s FOMC meeting. A Reuters article based on "sources" said ECB policy makers disagree on the fate of the purchase programme (see headlines). It’s unclear what conclusion to drawn from it. The Bund rose before and after the publication, but couldn’t really build out the gains.
At the time of writing, US yields declined by 1 bp to 1.3 bps. German yields dropped between 0.3 bps (2-yr) and 2.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany were small with Italy and Spain slightly outperforming (-2-to-3 bps).
Currencies
USD struggles going into the FOMC decision
USD trading remained technical in nature today, as investors are counting down to tomorrow’s FOMC decision. USD/JPY set a new correction top, but reversed earlier gains later on. EUR/USD traded close to mostly slightly below the 1.20 mark.
Overnight, Asian equities trades with modest losses. Japan outperformed on catching up after yesterday’s holiday and yen weakness. PM Abe was rumoured to call snap parliamentary elections. Markets assume that a continuation of the current policy also includes an extension of the ultra-loose BOJ policy. This was an additional negative for the yen. EUR/USD maintained a cautious upward bias (1.1975 area). There was no indication of USD strength going into tomorrow’s FOMC decision.
Trading in EUR/USD and USD/JPY was technical driven in Europe too. USD/JPY set a new correction high in the 111.88 area just before the open of the European markets. Afterwards, the dollar lost slightly ground, both against the yen and the euro. EUR/USD even filled offers just north of 1.20. However, a sustained re-break of this psychological barrier didn’t occur. A, modest intra-day correction of EUR/JPY probably capped the topside both in EUR/USD and USD/JPY. German ZEW investors sentiment was again stronger than expected, but didn’t bring further support for the euro.
Around noon there were again rumours from sources on disagreements within the ECB on the details/timing of APP tapering. The euro lost a few ticks after those headlines and EUR/USD returned temporary to the mid 1.19 area. US housing data were marginally stronger than expected, but the positive surprise was not enough to support the dollar. EUR/USD trades in the 1.1980 area. USD/JPY is changing hands in the 111.45 area. Despite recent USD/JPY gains (which we consider yen weakness), investors remain cautious on the US currency going into the Fed policy decision.
Sterling continues trading off recent top.
Today, sterling traded with a slightly negative intraday bias. Over the previous week, sterling rallied sharply as the BoE warned that it was likely to raise its policy rate in the coming months. The view was also subscribed by BoE governor Carney in a speech yesterday evening. Even so, the Carney comments marked the start of a (modest) countermove that filtered through into today’s trading. The political bickering between UK PM May and UK Foreign Secretary Johnson was maybe also a slightly sterling negative. EUR/GBP trades currently at 0.8865. Cable hovers around 1.3525. Is sterling topping out after its impressive rebound?
