- European equities trades listless, but marginally negative with underperformance of Madrid and Milan. US equities open with modest gains eyeing again the all-time highs, with energy outperforming.
- The IMF raises its 2017 and 2018 GDP growth forecast for the U.S., China, euro area and Japan in its October World Economic Outlook published in Washington. It warned policy makers not to get too comfortable.
- French president Macron’s plans to make common cause with Germany to reform the eurozone have suffered an early setback as Berlin pushes proposals for sovereign debt write-downs that Paris fears could shatter investor confidence in the single currency. Help from the euro area’s bailout fund should always be conditional on a government restructuring its debt and putting investors in line to suffer losses.
- The ECB said holdings of Greek sovereign bonds acquired under its SMP programme had resulted in €7.8bn of net income interest between 2012-2016. These profits are redistributed across all EMU central banks.
- The UK’s core trade deficit widened by £2.9bn to £10.8bn in the three months to August, the ONS said. Stripping out erratic items such as gold and ships, the goods deficit expanded by £3.8bn compared to the previous three-month period, while the services surplus offset that slightly, widening by £800m
- Output in the UK’s industrial sector improved for a 3th straight month in August, with an much better than expected improvement in manufacturing pushing growth to its highest level since February. Production increased 1.6% Y/Y, versus 0.8% Y/Y expected.
- French industrial production disappointed in August, dropping 0.3% M/M to be up a modest 1.1% Y/Y, following a sharp upwardly revised 0.6% M/M and 4.1% Y/Y in July. Italian production, on the contrary, defied consensus estimates for a second month in a row. Production rose strongly by 1.2% M/M and 5.7% Y/Y in August. .
Rates
Core bonds remain in wait-and-see mode
The return of US traders didn’t bring more animus than yesterday. Sideways bund trading with a slight negative tone in the afternoon reverses yesterday’s gain. The eco calendar remained unattractive and the data were as expected largely ignored. German trade surplus was larger than expected as exports spurted ahead. French production disappointed and Italian one exceeded expectations (both August). US NIFB small business optimism disappointed in September, but was overlooked too. No main impetus from equities either (small losses), nor from oil that digests a modest downside correction after a strong September rally. Auctions went well, but didn’t affect overall bond sentiment. All in all, despite a high number of data releases and fresh supply, there wasn’t much for traders to get excited about. End-investors are waiting for US key eco releases on Friday and headline event news starting this evening with the Catalan parliament meeting, followed tomorrow with the FOMC Minutes, central bank speakers and more supply.
At the time of writing, German bond yields are up 0.5 (2-yr) to 1.4 bp (10-yr), erasing yesterday’s modest declines. US Treasuries are virtually unchanged. Also, the intra-EMU bond market trading remained lethargic ahead of a key meeting of the Catalan parliament. The German-Spain 10 yr yield spread is unchanged. Other spread changes vary between +1 bp (Italy) and -1 bp (Portugal/Greece).
The Slovak debt agency successfully launch a new €1B 30-yr benchmark (2% 17 Oct 2047) at mid-swap +45 from an initial price target of low to mid 50s and is priced 75 bps over DBR 1.25% August 2048. The book was a multiple of the issue size. The new issue is a significant lengthening of the Slovak curve. Finland sold €1B of its 0% 2022 bonds at a yield of -0.267% (average price 101.21). The 1.50 bid/cover was in line with the result at the April auction. Germany sold 0.799B of its 0.1% April 2026 IL bunds at an average yield of -1.04%. Bundesbank retained about 20.1% for its market regulation fund. Total bids amounted to €1.516B or a bid/cover of 1.9.
Currencies
No negative impact from Catalonia on the euro (yet).
There was again little high profile news to guide USD trading. The dollar traded soft in Asia and this bias persisted during the EMU and US sessions. Investors keep an eye at the developments in Spain, but for now, it has no negative impact on the euro. EUR/USD trades in the 1.1790 area. USD/JPY hovered close to mostly slightly below the 112.50 handle.
Overnight, equity sentiment improved gradual throughout the session. The PBOC fixed the yuan strong against the dollar. PBOC officials aim for a more market-based regime for the yuan. Yuan strength weighed on the dollar overall. EUR/USD traded in the 1.1775 area at start of European trading. USD/JPY initially outperformed the other cross rates and stabilized in the 112.50/70 area.
German August trade balance data were strong. The euro briefly gained a few ticks after the release, but as is usually the case, it was no game-changer for EUR/USD trading. USD softness persisted during the European session. EUR/USD jumped temporary north of 1.18. Changes in core yields were limited. If anything interest rate differentials narrowed slightly in the disadvantage of the dollar. USD/JPY cede the 112.50 floor and dropped to the 112.30 area. The US NIFB small business confidence unexpectedly declined from 115.3 to 113 (115 was expected). However, it was ignored, probably as investors assumed that it was affected by the hurricanes. US equity indices continue their record race at the opening. However, for now it doesn’t support USD gains. There is still no negative impact from the potential turmoil after the meeting of the Catalonian Parliament this evening. EUR/USD trades in the 1.1790 area. USD/JPY hovers at about 112.40.
Sterling going nowhere on mixed eco data
Moves in sterling were modest today despite plenty UK eco data. Those data painted a diffuse picture. UK (manufacturing) production rose at a fairly healthy pace for the second consecutive month in August (0.4% M/M) and Y/Y figures jumped higher due to revisions of earlier data. At the same time, the August UK trade deficit printed at a record -£14 245 mln as imports rose much more than exports. So at least for now, the UK economy doesn’t profit from the decline of sterling after the Brexit decision. This set of conflicting data had no noticeable impact on sterling trading. EUR/GBP held a very tight range close to, mostly slightly below 0.8950. USD softness caused some modest further gains for cable. The pair trades currently in the 1.3175 area. Today’s data won’t change to BoE intention to raise its policy rate in the coming months.
