- WS opened higher supported by the run of strong earnings amongst others from Caterpillar and 3M. Also McDonald and GM beat expectations. However, opening gains are fading fast after a few minutes of trading.
- Italy’s Banca Monte dei Paschi di Siena has said mooted European Central Bank rules that would demand higher provisioning against soured loans risk it failing to meet planned targets for its turnaround
- British chancellor Philip Hammond has said the benefits of the internal market are "absolutely clear to us" and "we won’t allow it to be compromised" in relation to the union between Scotland and the rest of the UK.
- PMI business conditions in the euro zone fell slightly more than expected this month, with the services sector reporting a slowdown in activity growth. The composite PMI index slipped to 55.9 in October from 56.7 in September. That was well under the consensus estimate of 56.5. Overall, the PMI’s suggest ongoing strong growth.
- EC president, Mr. Juncker, has insisted that Brussels wants to reach a "fair deal" with Britain, in a bid to dampen down the furore over media reports allegedly containing details of his dinner last week with UK PM May
Rates
Core bonds sell off as fears of a hawkish ECB mount.
Core bonds were under pressure throughout the whole session. The EMU PMI business confidence was a mixed bag with manufacturing stronger and services weaker-than-expected. Overall though, they suggest ongoing strong growth. However, the PMI’s weren’t behind the bond selling. We suggest that jittery investors positioned for a more hawkish than expected ECB and maybe also for a more hawkish composition of the FOMC after US president Trump nominates a new chair and other new governors. At least investors don’t want to be long bonds ahead of these events. There was little fresh news on these items, but today’s sell-off might have been a resumption of selling that occurred after the US Senate adopted the 2018 budget and was interrupted yesterday by a dull Monday session. Interestingly, the US 10-yr yield tests the key 2.40% resistance area, which if broken, opens the way for an extension towards 2.64%. The T-Note future set a new correction low at 124-23 and is now close to the key 124-14 July low. Other markets didn’t show a similar straight directional move. Caution is warranted, as there wasn’t an obvious driver behind the bond moves and as volumes traded were rather modest.
At the time of writing, the German yield curve bear steepened with yields up between 2.2 bps (2-yr) to 4.9 bps (10-yr). The US curve also steepened with yields up between 1.3 bp and 4.3 bps (30-yr). In the intra-EMU bond market, Peripheral 10-yr yield spreads narrowed by 4 bps (Greece/Portugal & Spain), while Italy lagged (-1 bp), maybe due to upcoming supply.
Currencies
Dollar still shows diffuse trading pattern
Trading in the major USD cross rates showed again no consistent trading pattern. An initial decline of EUR/USD was blocked after mixed, but still strong EMU PMI’s. A further rise in US and EMU yields supported the likes of USD/JPY and EUR/JPY as investors continue to look forward to the ECB policy decision later this week.
Overnight, Asian equity indices mostly traded slightly stronger despite yesterday’s correction on WS. The dollar eased marginally as the rise in core yields halted (temporary ). USD/JPY hovered in the 113.25/50 area, near yesterday’s intraday low. The euro remained resilient despite ongoing uncertainty on Spain. EUR/USD rebounded slightly to 1.1760/70 area.
Early in Europe a rise of core yields initially favoured the dollar. EUR/USD dropped to the 1.1745 area. The EMU PMI’s were mixed French data were stronger than expected. The German manufacturing PMI was also stronger than expected, but services and the composite PMI missed the consensus. This pattern was also visible in the EMU PMI. Even so, the PMI’s confirmed that the EMU growth remained solid at the start of the final quarter of the year. EUR/USD rebounded to the 1.1765/70 area. Changes in interest rate differentials were limited. If anything, they narrowed marginally in favour of the euro. The rise in EMU and US yields also supported the likes of USD/JPY and EUR/JPY (and e.g. EUR/CHF). Sentiment on risk also improved throughout the morning session.
US equity futures indicated stronger US cash stocks. This positive sentiment on risk prevented further USD losses. USD/JPY jumped close to the 114 area, but the move stalled just ahead of the big figure. The pair trades currently in the 113.85/90 area. EUR/USD is little changed compared to the start in Europe and trades in the 1.1760 area. Trading in core bonds and in the major USD cross rates is driven by conflicting factors going into Thursday’s ECB meeting. Investors apparently don’t want to be wrong-footed if the ECB would reduce policy stimulation in a more aggressive way. This attitude currently prevents a further decline of EUR/USD and supports USD/JPY and EUR/JPY.
Sterling returns part of recent rebound
Today, sterling erased part of last week’s post EU summit gains. The exchange of words between EU and UK officials turned more constructive of late, even without any concrete progress in the negotiations. UK officials also feel that an agreement on a transition period is unlikely until there is sufficient progress on the nature of the future EU-UK trade relationship. This scenario leaves UK businesses in uncertainty as the Brexit negotiations drag on. EUR/GBP rebounded off the sub-0.89 recent lows and trades again in the 0.8940 area. Cable dropped modestly and trades in the 1.3150 area.
