- European equities showed modest gains today in an uneventful trading session. German markets are closed for the Day of German Unity. US stock markets opened with small gains (+0.2%).
- Eurozone producer price growth picked up significantly more than expected in August, underscoring the rebound in inflation across the currency bloc. Industrial producer prices rose 2.5% Y/Y in August, compared with 2% Y/Y in July.
- The British government has not yet cleared hurdles over its Brexit bill, Ireland and the rights of citizens, to move on to the next phase of its EU exit talks, Brussels’ chief negotiator Barnier said.
- UK construction unexpectedly shrank for the first time in more than a year in September as Brexit weighed on investment in commercial building. The construction PMI fell from 51.1 to 48.1, way below 51.1 forecast. Crucially, it’s also below the 50 level that divides expansion from contraction.
- Brexit poses risks to the ability of British companies to borrow from European banks and to some clearing activity which might have to relocate from London once Britain leaves the EU, the Bank of England said. Policymakers also feared that financial markets’ reliance on Libor created a major risk to the UK’s financial stability.
- Turkey’s core inflation spiked to a 13-year high last month (11.2% Y/Y), prompting President Erdogan to blame high interest rates for fuelling price growth, reiterating an unorthodox stance that has unnerved investors. EUR/TRY rose to 4.22, matching the highest levels on record.
- Romania’s central bank kept its benchmark interest rate unchanged at a record low 1.75% as expected, but altered overall policy by narrowing the gap between its deposit and lending rates. The symmetrical corridor will shrink to 1.25% from Oct. 4, from 1.50%, affecting interbank rates.
- Saudi Arabia is mulling oil and gas investments in Russia in a sign of deepening ties between the two countries. Talks are still at an early stage but framework accords could be signed this week during the Saudi king’s visit to Moscow. A proposal on extending OPEC cuts could also come this week, Russian Energy Minister Novak said.
Rates
Uneventful trading session
Global core bonds traded with a downward bias until European noon. Higher EMU August PPI data can explain the Bund’s underperformance. Sentiment turned for the better for core bonds as US traders entered dealings. Traded volumes in the Bund were extremely low with German markets closed for Day of the Unity and amid the uneventful eco calendar. Many investors remained also side-lined with key US eco releases in mind (US non-manufacturing ISM, ADP employment and payrolls). Today’s moves had no technical implications. We remain in a sell-on-upticks environment in the Bund and especially the US Note future.
At the time of writing, the German yield curve bear steepens with yields 0.2 bps (2-yr) to 3.1 bps (30-yr) higher. Changes on the US yield curve vary between -0.4 bps (2-yr) and +1.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between +1 bp (Spain) and -4 bps (Portugal).
Currencies
Dollar rally stalls due to lack of ‘new news’
There was hardly any (economic) news to guide USD trading today. The dollar rally took a breather after recent gains, awaiting more guidance from key eco data (including the US payrolls) later this week. EUR/USD even succeeded a cautious intraday rebound. The pair trades currently in the mid 1.17 area. USD/JPY hovers in the 113 area as major US equity indices continue to set (minor) new all-time record levels.
Overnight, Asian equities ex-Australia joined the positive sentiment from WS. The dollar stayed well bid, supported by strong equities and a minor rise in US yields. USD/JPY rebounded north of 113. EUR/USD dropped to a new correction low in the low 1.17 area. The Reserve Bank of Australia as expected left its policy rate unchanged at 1.5%. The policy statement repeated that a stronger Aussie dollar weighs on inflation, growth and employment. The Aussie dollar declined to the 0.78 area.
EUR/USD filled bids just below 1.17 at the start European dealings. So, it looked like yesterday’s gradual resumption of the reflation trade would continue, resulting in higher yields, higher equities and a higher dollar. However this wasn’t the case. Equities mostly traded with marginal gains and so did European yields. This time it didn’t help the dollar. On the contrary. EUR/USD rebounded back higher in the 1.17 big figure. We didn’t see any specific news to explain the move. If anything, interest rate differentials between the US and Germany narrowed slightly. This perhaps triggered some USD profit talking. There was also a lot of market talk about option-related activity. However, we don’t make too much out of it. There was little news and trading volumes were low as German markets enjoyed a banking holiday.
There were also very few eco data in the US. Even so, the intraday USD correction halted. EUR/USD trades in the 1.1755/60 area. USD/JPY tries to stay north of the 113 big figure as US equities extend their gradual record-setting uptrend. In a broader perspective, the dollar rebound takes a breather awaiting more guidance from key eco data later this week, including the payrolls.
Sterling extends correction
Over the previous days sterling momentum clearly become less buoyant and this was also the case today. However, this time sterling in the first place lost ground against the euro. EUR/GBP rebounded further away from the key 0.8742/75 support area. Losses in cable were more modest as the dollar declined intraday. The UK September construction PMI dropped from 51. to 48.1, 1 indicating that activity in the sector contracted last month. The construction PMI is not the most important indicator for markets. However, coming on the heels of a softer manufacturing PMI yesterday, it didn’t help sterling. The BoE also warned for potential disruptions in clearing activity after Brexit, but also on financing of UK corporations via from European banks. EUR/GBP trades currently in the 0.8875/80 area. Cable still set another ST correction low intraday and trades currently in the 1.3240 area. The scenario of a BoE rate is apparently (more than discounted).
