- European equities tread water today with Spain outperforming (+0.75%) following this weekend’s developments in the Spain-Catalunya stand-off. US markets are closed for Columbus Day.
- German industry rebounded from a summer lull with its best month in six years, keeping Europe’s largest economy on a solid footing in the second half of the year. Output, adjusted for seasonal swings and inflation, increased 2.6% from July when it fell a revised 0.1%.
- After 208 days of tough negotiations, the leaders of four Dutch parties (VVD, D66, CU and CDA) agreed on a draft program for a new centre-right coalition government under Prime Minister Mark Rutte that will likely push policies further to the right.
- Theresa May’s attempt to put pressure on the EU to move on to the next stage of Brexit talks received an early setback after the European Commission said that the "ball is entirely in the UK’s court".
- Germany’s Greens rejected a deal reached within Chancellor Angela Merkel’s conservative bloc to limit migrants to 200,000 a year, but said coalition talks should get under way anyway.
- The ECB is still concerned with the stock of bad loans clogging up bank balance sheets in the euro zone, ECB Mersch said. The ECB last week issued new proposals that will force banks from 2018 to set aside more cash to cover newly classified bad debts and may also present additional measures to tackle the sector’s huge stock of soured debt.
Rates
Bund treads water in thin market conditions
The German Bund gained slightly ground after today’s opening, but hovered sideways in a narrow range for the remainder of the European session. Traded volumes were extremely low. Japanese and US markets are closed today and the EMU eco calendar only contained (very strong) German production data. Last week’s failure to break above 0.50% resistance (German 10-yr yield) suggests some consolidation ahead despite this week’s heavy EMU supply calendar.
The German yield curve bull flattens at the time of writing with yield changes ranging between flat (2-yr) and -1.1 bp (30-yr). On intra-EMU bond markets, 10-yield spread changes versus Germany range between +1 bps and -1 bps with Italy (-3 bps) and Spain (-5 bps) outperforming. Spanish bonds profit after this weekend’s mass demonstrations against the Catalan secession case which play in the advantage of PM Rajoy’s in the current stand-off. Dutch bonds don’t react to the announcement of a new centre-right coalition government under PM Rutte after more than 200 days of negotiation.
The Slovak debt agency announced the near-term syndication (likely tomorrow) of a new 30-yr benchmark. The new issue is a significant lengthening of the Slovak curve. Currently, the longest-dated outstanding Slovak bond is a 20-yr one (SLOVGB 1.875% Sep2037; issued in Q1 2017).
Currencies
Sideways trading in main dollar crosses
The greenback traded listless in a tight range during today’s session following a failed attempt of the dollar to gain more ground after the payrolls on Friday. A thin calendar and the absence of US traders (Columbus Day) contributed to the dull trading. Tensions between the US and Turkey and ongoing uncertainty about Catalonia didn’t affect global currency markets. At the time of writing, EUR/USD trades around 1.1740, barely 10 ticks above Friday’s close. USD/JPY trades at 112.70, nearly unchanged on the day.
Overnight, Japanese markets were closed, making the start of trading even thinner than is usual the case on Monday. Weak Chinese PMI’s were ignored, leaving a modest risk-on sentiment in equity markets. However, it didn’t impact USD/JPY or EUR/USD, which both traded near opening levels.
A shy attempt to push EUR/USD lower at the start of European trading after very strong August German production data ran rapidly into resistance and an intraday low around 1.1720 was reached when European equities started trading. Tensions about Catalonia’s independence eased after the mass demonstrations in favour of Spanish unity. We shouldn’t give too much credence to explain the sluggish move higher of the euro to this intrinsically euro positive factor. The pair topped out even before reaching the 1.1750 level and trades currently at 1.1740, insignificantly above Friday’s closing levels. Moves in USD/JPY were even smaller during the European session.
Sterling strengthens as PM May re-asserts her authority
Following a 6 days losing streak, when investors scaled back sterling long positions, sterling managed to gain ground today versus euro and dollar. There were no economic data of importance, but the political future of PM May became again a bit more secure. On the weekend, she reasserted her authority as she mulled over a cabinet reshuffle in which Foreign Secretary Boris Johnson may be axed. This bit of news might have been enough to bolster sterling, as the trimming of sterling long positions might have finished (for now). We would currently consider the sterling rebound as corrective in nature. The alleged attempt of PM May to put the Brexit-ball in the EU camp during a speech that she will give later today, was already countered by the EU-27. A EU Commission spokesman said the ball is entirely in the UK Court. EUR/GBP was already downwardly oriented in late Asian trading and continued to slide lower in the European session. The pair is currently still near the intraday low near the 0.8910 level from Friday’s 0.8915 close. Cable trades at 1.3160, up from 1.3066 Friday’s eve.
