- European equities traded listless in an uneventful session. Main indices oscillate around yesterday’s closing levels. US stock opened around 0.2% higher with Nasdaq outperforming (+0.5%).
- Oil bulls are back in the driver’s seat with $60/barrel in sight, but it could be a short ride. OPEC and Russia are cutting output deeper than ever and demand is surprisingly strong. Global prices have jumped more than 20% since June, with Brent hitting a two-yr high early today at $59.50/barrel before some profit taking kicked in.
- German Chancellor Merkel already faces complex coalition negotiations with at least three other parties. Now French President Macron wants her in on the act. Macron will give an important speech on the future of the euro area later today.
- Hungary edged closer to issuing its first hard-currency bond since 2014, announcing plans to sell in euros and buy back as much as $1.2 billion of existing debt. Debt agency officials will meet investors in Europe from Sept. 27, offering a benchmark-sized 10-year euro bond in its first sale in the currency since 2011
- German Chancellor Merkel signalled further euro-area integration is on hold as she embarks on difficult talks to form a new government, saying any proposals would have to be "sensible" and make Europe more competitive
- Later today, attention still goes to several Fed speakers including Yellen who speaks on inflation, uncertainty and central bank policy.
Rates
Core bonds slightly lower in listless trading
In a dull, low volume session without key economic data, the easing of the risk-off sentiment weighed marginally on core bonds which gave back small part of yesterday’s gains. The Bund essentially hovered sideways intra-day, slightly below Monday’s close. French business confidence was as expected strong and so was Italian business confidence. The German Schatz auction went reasonably well, but neither had much impact on bond trading. Equities hovered also near yesterday’s closing levels and oil was hit by some profit taking after a strong run in past days, but we didn’t see any reaction of core bonds on the minor developments in other markets. As our report is published, US consumer confidence and New Home sales will be published, followed by a raft of Fed speakers and a 5-yr Note auction. So, trading may still become livelier than hitherto.
At the time of writing, German yields are flat (2-yr) to 1.4 bp higher, while US yields are 1 to 1.7 bp higher, bear flattening the curve. In the intra-EMU bond market, moves were limited with still no noticeable reaction on the Spanish/Catalonian power struggle. The Italian and Spanish 10-yr yield spreads (versus Germany) are 1 and 2 bps lower, the Portuguese spread shed 4 bps.
Currencies
EUR/USD drops below 1.1823 support
There was not one distinct theme to guide FX trading today. North Korea and other event risk caused some investors caution, but the direct impact on markets ebbed again. The euro extended yesterday’s correction and finally dropped below 1.1823 support. At the same time, the dollar was slightly better bid. The traded-weighted dollar tries to move away from the recent lows; USD/JPY rebounds north of 112.
Yesterday’s risk-off trade in the US also left some traces in Asia overnight, but the losses remained very modest. USD/JPY hovered in the mid 111 area, near yesterday’s low. The yen was again better bid as multiple event risk (North Korea, Kurdistan, Obamacare and US tax debate) countered hope for a stimulating policy. EUR/USD stabilized in the mid 1.18 area.
The overnight price action due to the multiple event risk also caused a negative European equity opening. However, there were no follow-through losses and tensions eased soon. French confidence data were OK, but no issue for the FX market. Changes in US and core European yields were limited. Even so, the euro continued yesterday’s gradual decline and finally dropped below the 1.1823 ST range bottom. The move was mainly euro softness, but the rise in the trade-weighted dollar also suggests a cautious bottoming out process in the US currency.
There was also no clear story in the US to guide trading, as was the case in Europe. US equity futures rebounded after yesterday’s correction. The easing in global market tensions allowed USD/JPY to regain the 112 big figure. EUR/USD trades in the 1.1790 area. The USD gains on points against a weak single currency.
Sterling short squeeze to slow?
EUR/GBP traded just below 0.88 at the start of the European session. A large order supposedly pushed EUR/GBP below the 0.8775 support/recent low. EUR/GBP filled bids in the 0.8755 area. From there some sterling selling kicked in. EUR/GBP rebounded even as EUR/USD maintained a negative intraday bias. It looks that the recent sterling short-squeeze might be losing some momentum. The UK August lending data were soft, but we doubt they were important for the intraday change in sterling sentiment. EUR/GBP trades in the 0.8775 area, which should be considered a mediocre performance of sterling given the overall decline of the euro. Cable traded with a negative intraday bias and sits currently in the 1.3440 area. The negotiations between the UK and the EU have restarted. Comments from EU’s Barnier didn’t suggest much progress despite the modestly positive comments after last week’s speech of UK PM May.
