- European equities traded listless near opening levels with Spain outperforming. US equities open little changed.
- Spain’s prime minister has opened the way for Madrid to use a constitutional "nuclear option" to suspend Catalonia’s autonomy, demanding that the regional government makes clear whether it considers itself independent.
- UK Chancellor of the Exchequer Hammond said he will start releasing more money to help prepare for a "no deal" Brexit if there aren’t clear signs of progress in talks with the European Union by early 2018.
- Chicago Fed Evans says he’s a little nervous that unless inflation expectations start to move up in a way consistent with the Fed’s target, the next couple of moves could not be constructive.
- Dallas Fed Kaplan said he wants to see more signs of upward inflation before raising interest rates again, but that low long-term borrowing costs may limit how far and fast rates can be raised.
- Contentious new US demands are set to hit NAFTA negotiating tables, threatening to push modernization talks toward collapse as Canadian Prime Minister Justin Trudeau again tries to remind U.S. President Donald Trump of the trade pact’s merits.
- Several hundred supporters of Italy’s 5-Star Movement chanted slogans and waved flags in front of parliament to protest an electoral law that is likely to penalise the maverick party ahead of next year’s national election.
- The EC proposed softer measures to strengthen the EU banking sector against future crises, after two years of fruitless talks. The watered-down proposals are designed to win over Germany. But they could create frictions with the ECB over the pace of reduction of banks’ exposure to bad loans.
- Opec expects stronger demand for its crude oil next year due to stronger consumption growth and lower estimates for supply from outside the cartel, as WTI prices near $50 a barrel boost driving and crimp output.
Rates
US Treasuries outperform Bunds
Global core bonds parted ways today with US Treasuries (higher) outperforming German Bunds (flat). Trump’s administration made specific proposals to weaken NAFTA while two voting FOMC governors (Chicago Fed Evans and Dallas Fed Kaplan) sounded dovish on inflation, questioning a December rate hike. The Bund initially lost some ground as Spanish assets opened strong following Catalan President Puidgemont’s speech, but the move never went far. Intraday, Spanish gains were partly reversed after PM Rajoy put the ball back in the Catalan camp after an emergency cabinet meeting. They issued a formal request to the Catalan government in Barcelona for confirmation of whether it has declared independence, amid "confusion created deliberately." A confirmation from Catalanya could cause Madrid to trigger article 155, stripping the region from its autonomy.
At the time of writing, the US yield curve bull flattens with yields 0.4 bps (2-yr) to 2.6 bps (30-yr) lower. The German yield curve bear steepens with yields 0.6 bps (2-yr) to 1.5 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Spain (-3 bps) and Portugal (-4 bps, supply-related see below) outperforming and Italy (+4 bps, see headlines + upcoming supply) underperforming.
The Dutch debt agency launched a new 7-yr DSL (0% Jan2024) via Dutch direct auction. They raised €6.57B at 12 bps above the German DBR 1.75% Feb2024. The raised amount was near the upper end of the €5-7B target. The Portuguese Treasury successfully tapped two OT’s for a combined €1.25B (€0.5B 2.2% Oct2022 & €0.75B 4.125% Apr2027). The auction bid/coverr was a strong 2.23. Auction yields declined significantly from previous taps thanks to S&P’s rating upgrade to investment grade. The German Finanzagentur raised €3B via tapping the on the run Bobl (0% Oct2022). Total bids amounted to €4.52B, above the €3.83B at the previous 4 Bobl auctions and resulting in an official bid cover of 1.9. The Bundesbank set aside €0.61B for secondary market operations (real bid cover 1.5). The auction had no tale. The US Treasury starts its mid-month refinancing operation later today with a $24B 3-yr Note auction and a $20B 10-yr Note auction. The WI’s currently trade around 1.65% and 2.34% respectively.
Currencies
Dollar in the defensive. Euro ignores Catalan tensions
The political developments in Catalonia dominated the news headlines, but had little impact on the markets outside Spain. EUR/USD extended the gradual rebound from past days, but this move also mirrored ongoing USD softness. USD/JPY also drifted back south in the 112 big figure as the US currency didn’t receive any additional interest rate support.
Overnight, most Asian equities continued their uptrend with several indices nearing multi-year or even all-time record levels (Kospi), even as the positive momentum slowed later in the session. The dollar stabilized after the recent decline, but without an indication of a real comeback. Political bickering within the Trump administration raised questions on the ability to execute the tax reform plans. EUR/USD traded in the 1.1815 area. USD/JPY is little changed at 112.50.
The decision of the Catalan government to delay the declaration of independence had very little impact on the markets outside Spain. Spanish 10-year yield spreads narrowed 4-5bp and Spanish equities rebounded about 1.5%. Core European yields were little changed. EUR/USD extended the rebound from past days and touched the 1.1845 area. The relative calm in Spain was maybe a slight supportive. However, the move also mirrored USD softens. USD/JPY traded with a slight intraday negative bias.
At noon, Spanish PM Rajoy asked the Catalan government whether it has declared independence. If so, the central government could implement article 155 of the constitution and take over the powers from the regional government. Still, there was hardly any market reaction. EUR/USD stabilized around 1.1825.
There were no important data in the US. Despite uncertainty on Spain, the dollar was more in the defensive than the euro. We didn’t see a specific reason. The positive USD momentum of last week has clearly worked out and there is no other additional good news to support further USD gains. Fed’s Evens said he worried on low inflation and is in no hurry to raise rates right now. Friday’s CPI and retail sales might be the next important data to trigger a directional USD move. If anything, the US/German interest rate differential narrows marginally. EUR/USD trades in the 1.1845 area. USD/JPY is drifting back south to the 112 area. Later this evening, FX traders will keep an eye at the minutes of the September Fed meeting.
Sterling still captured in technical trading
There were no important eco data in the UK. Sterling initially traded with a modest negative bias, especially against the euro . UK Chancellor of the Exchequer Hammond said he is considering to release more money to prepare for a ‘No deal Brexit’ scenario if there aren’t clear signs of progress by early 2018. There was no reaction of sterling to the Hammond comments. However, they illustrate that the clock is ticking for the UK and that UK companies desperately need progress and clarity on the Brexit process. EUR/GBP trades in the 0.8970/75 area, nearing the recent correction top. Sterling also lost slightly marginal ground against a weakish dollar. Cable trades in the 1.3200 area.
