- European equities gain around 0.5% today despite a surge in yields. US equities open with gains between 0.3% and 0.6% as investors look forward to the Trump tax cut plan.
- Growth in the amount of money circulating in the EMU, which is seen as a precursor of inflation, surged last month to 5% Y/Y, while bank lending was little changed. Growth in corporate lending picked up to 2.5% Y/Y in August from 2.4% Y/Y a month ago, moving sideways for much of this year, while household lending held steady at 2.7%.
- US orders for business equipment increased more than forecast in August (1.7% M/M), indicating solid demand is continuing in the third quarter. Shipments of non-military capital goods orders excluding aircraft, which are used to calculate GDP, increased 0.7% M/M (est. 0.1% M/M rise) after a revised 1.1% M/M advance in July.
- The Czech National Bank kept its policy rate unchanged at 0.25% today, but policy makers in Prague indicated that the vote was 4-3 with three governors in favour of an immediate increase to 0.50%. A November rate hike is now nearly certain. EUR/CZK attempts to move below 26.00, but the test fails for now.
- US president Trump is expected to announce in a speech today that American corporations would see their tax rate cut below many of their counterparts elsewhere, under a sweeping White House and Congressional plan that aims to slash the corporate tax from 35% to 20%.
- German Finance Minister Wolfgang Schaeuble is ready to give up his post and become president of Germany’s parliament, ending his eight-year term as the euro area’s dominant finance chief, a party official said.
Rates
Trump’s expected tax reforms revive reflation trade
Global core bonds lost significant ground while the dollar excelled on FX markets. US President Trump is expected to announce his tax reform plan later today which includes slashing the corporate tax rate from 35% to 20%. It revived investor’s reflationary spirits with global central banks, the Fed in particular, clearly drawing the card of policy normalization. Strong eco data on both sides of the Atlantic (EMU M3 money supply data and US durable goods orders) supported the reflation trade. US and German yield curves bear steepened. Changes on the US yield curve ranged between +4.3 bps (2-yr) and +7.6 bps (10-yr). The US 2-yr yield approaches 1.5% for the first time since the end of 2008. German yields increase by 3 bps (2-yr) to 7.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow 4/5 bps for Portugal, Spain and Italy. Greece (+6 bps) underperforms.
The US Treasury continues its refinancing tonight with $13B 2-yr FRN auction and $34B 5-yr Note auctions. The WI of the latter currently trades around 1.915%.
Currencies
USD profits as reflation trade resumes
European investors kick-started quite an impressive new leg in the reflation trade today. Yellen’s confirmation of the Fed’s intention to normalize policy, the prospect of/hope for a US tax proposal and good eco data all added to the overall positive sentiment. The dollar was the main beneficiary among the major currencies, even as US and EMU yields rose more or less in lockstep. The break of EUR/USD below 1.1823 is confirmed. The pair trades currently in the 1.1725 area. USD/JPY regained the 113 big figure.
There was no clear trend on Asian markets this morning. Japanese equities struggled to build out gains even as USD/JPY remained well bid. The pair traded in the mid 112 area. Chinese equities outperformed. Industrial profits rose from 16.5% to 24.0% Y/Y. Brent oil held just below $59/barrel after a modest correction yesterday. EUR/USD traded in the 1.1775 area, marginally lower from yesterday’s close. The dollar maintained yesterday’s gains.
Contrary to rather directionless trading in Asia, European investors saw enough good reasons to kick-start some kind of new reflation trade. Yesterday’s comments from Fed’s Yellen finally caused investors to raise the probability of a December rate hike. The Trump administration laying the groundwork for a new tax reduction plan also supported the reflation trade. European equities jumped higher and core US and European yields rose further. The interest rate differential between the US and Europe rose only marginally at best. Even so, the dollar was the major beneficiary of this risk-on market repositioning. EUR/USD traded with a downward intraday bias and changed hands in the 1.1750 area around noon. USD/JPY neared the 113 big figure.
US investors simply build on the trends for Europe. US durable goods orders were strong and reinforced the USD rebound. EUR/USD trades currently in the 1.1720 area. USD/JPY regained the 113 barrier, currently changing hands in the 113.25 area.
Last week it took some time for investors to become convinced that there is a good change for the Fed to continue a gradual policy normalisation. However, sentiment has finally changed. Recent event risk that blocked the reflation trade and the rebound of the dollar is not yet definitively out of the way. Even so, the technical picture of the dollar has improved in a significant way.
Sterling holds strong even as rebound slows
This morning, it looked that the recent sterling short-squeeze could lose further momentum. The rise of the dollar this time also caused a sharp decline in cable. In this move, EUR/GBP was pushed back up to the high 0.87 area. The ongoing stalemate in the new round of Brexit negotiations also caused some sterling profit taking. However, the move was short-lived. EUR/GBP gradually traded again more in line with the overall decline of EUR/USD. At noon, sterling received additional support from the CBI retail data. Reported sales beat the consensus by an astonishing wide margin (42 from -10, 8 expected). The report has often little impact on trading, but this time it couldn’t be ignored. EUR/GBP dropped to the 0.8755 area and trades currently around 0.8760. Cable traded with a negative bias for most of the day on overall dollar strength. Even so, the damage for GBP/USD remains modest. The pair trades currently in the 1.34 area.
