- European equities showed modest gains in an uneventful session. Madrid (-1.5%) bucked the trend due to the Catalonian issue. US equities opened marginally higher too.
- Spanish bonds, stocks and the euro came under pressure on Monday after more than 2m Catalans voted for the region’s independence, deepening a political crisis in one of the eurozone’s best-performing economies. The Spanish government drew condemnation from some parts of Europe after police hit people with truncheons and fired rubber bullets in an attempt to stop the referendum
- The unemployment rate in the eurozone has stuck at 9.1% in August, slightly disappointing the Reuters consensus forecast for a further small decline but still at the lowest point since February 2009. The rate is down from 9.9% per cent a year beforehand.
- Conditions in the UK’s manufacturing sector worsened in September, according to a closely-watched business survey, which pointed to a further growth slowdown, in contrast to hopes of a boost from the weak pound. The PMI index slipped from 56.7 to 55.9, worse than consensus economist forecasts of 56.4.
- Eurozone manufacturing firms reported their strongest month of job creation on record in September, according to a closely-watched series of PMI surveys which will provide further weight to central bank hawks hoping that the region’s recent economic recovery is stable enough to begin normalising monetary policy
- At least 50 people have been killed and 200 injured after a gunman opened fire on the crowd at a country music festival in Las Vegas on Sunday evening local time, mowing down concert goers and triggering panic around the city’s famous gambling strip
- US ISM business sentiment improved sharply in September, suggesting activity in the sector is accelerating. The headline index rose to 60.8 from 58.8 previously, exceeding the consensus estimate of 58.1. All key sub-indices like new orders, employment and prices went up and are above the 60 threshold.
Rates
Core bonds modestly higher; Spanish bonds sell-off
The Catalonian election result and the reaction of the Madrid government injected some risk off sentiment regarding Spanish assets at the start of European trading, but impacted the Bund or euro area equities only marginally. The Bund opened weak and it took some time to find its exposure, as euro area equities opened constructive due to a carry-over of positive Asian equity sentiment. However, when equities turned south, the Bund took the opposite direction and more than erased opening losses. However, soon both moved sideways, but still into positive territory, even as gains were modest. EMU PMI was revised marginally lower (58.1 from 58.2), but was of course ignored and so was the news of the repulsive mass shooting in Las Vegas. Going into the ISM release, core bonds gain a tad more ground, but gains remain modest.
At the time of writing, the German yields are 1.2 (2-yr) to 2.3 bp (30-yr) lower, while US yields fall between 0.5 and 1.3 bp. throughout the curve. In the intra-EMU bond market, the Catalonian election result and the stand-off with the central government weighs on Spanish and to a lesser extent other peripheral bonds. Spanish 10-yr yield spreads widened 10 bps, while Portugal and Italy widen 4-to-5 bps.
Currencies
EUR/USD loses a few ticks after Catalan referendum
The dollar initially traded with a cautiously positive bias today as global investors were inclined to extend the last week’s reflation trade. At the same time, the euro faced some headwinds from the uncertainty on Catalonia. However, the USD rebound lost momentum in the afternoon trade. USD/JPY trades in the 112.60 area. EUR/USD hovers in the 1.1760 area, awaiting the US manufacturing ISM.
Overnight, the Japan Tankan confidence was constructive with especially manufacturing and smaller non-manufacturing firms more optimistic. The headline index improved from 17 to 22. There was no reaction of the yen. USD/JPY profited from overall USD strength as markets pondered the potential impact of a US tax cut. EUR/USD declined to the 1.1775 area. USD strength prevailed, but there was also a minor fall-out from the tensions in Catalonia.
The negative impact from the Catalan vote was mostly limited to Spanish assets. Spreads on Spanish government bonds widened up to 10 bps (10-y) and Spanish equities declined (about 1.8%) while other European markets gained. Bunds outperformed US Treasuries, widening the interest rate differential in favour of the dollar. EUR/USD started a new intraday downleg early in Europe. The move was probably more or less evenly due to euro weakness and USD strength. A cautious continuation of the reflation trade supported the likes of USD/JPY and other USD cross rates. The EMU manufacturing PMI was revised marginally lower from 58.2 to 58.1, but at this lofty level it was no negative factor for the euro.
Sentiment remained cautiously risk-on as US traders joined the fray, but didn’t help the dollar. On the contrary , the US currency returned part of this morning’s gain. EUR/USD trades in the 1.1755 area. USD/JPY is changings hands in the 112.60 area. Today’s price action is modestly constructive from a dollar point of view. However, dollar bulls might still be slightly disappointed that EUR/USD didn’t decline a bit more. After the closure of this report, the US manufacturing ISM will still be published. A modest decline from a 58.8 to 58.1 is expected. A figure in line with consensus might be slightly USD supportive (58.1 is still a very high level).
Sterling extends decline
The pound ceded further ground today. Sterling declined against an overall stronger dollar, but also against the single currency, which was under slight pressure from the independence vote in Catalonia. EUR/GBP initially hovered in the low 0.88 area, but came gradually under pressure as the UK manufacturing PMI was slightly softer than expected at 55.9 from 56.7 (56.2 was expected). This remains a healthy level. Still it kick-started a gradual decline of sterling. The political bickering on the Brexit strategy between Foreign Secretary Boris Johnson and PM May also weighed on the UK currency. UK Chancellor of the Exchequer Hammond listed a series of Challenges for the UK economy post Brexit at the Conservative Party conference in Manchester. EUR/GBP trades currently in the 0.8860 area, drifting further away from the 0.8742/0.8774 support area. The loss of cable is quite substantial. The pair trades in the 1.3275 area compared to levels near 1.34 late last week and this morning in Asia.
