- European equities drifted cautiously lower early in the session, but trading turned much calmer after yesterday’s uptick in volatility. An intraday attempt to return into positive territory failed. Most major indices show losses of about 0.25%. US equities also started the session with marginal losses.
- Donald Trump told nations of the "Indo-Pacific" region that the US would no longer tolerate "chronic trade abuses", as he urged them to enter fair and reciprocal economic relationships with America.
- Theresa May is ready to increase Britain’s offer to the EU over the Brexit divorce bill, after signs that the hard Eurosceptics in her party will tolerate paying more money to break the deadlock in negotiations. Mrs May has said that Britain "will honour commitments we have made during the period of our membership" and her team are working on different scenarios that would see her considerably increase the €20bn she has already put on the table.
- EU chief negotiator Barnier raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the UK has two weeks to come up with a better offer on the financial settlement.
- The ECB’s commitment to keep interest rates low until after asset purchases end doesn’t leave policy makers room to raise borrowing costs next year, Governing Council member Nowotny said in a radio interview. He added that the ECB should have signalled its intention to end asset buying.
- UK production rose a larger-than-forecast 0.7% in September, with output increasing across most manufacturing sectors, the ONS said. But construction fell the most in 18 months and a narrowing of the trade deficit was not enough to prevent the shortfall widening in the third quarter.
- Inflation in Norway came in below forecasts for a second month in a row in October, falling to its lowest level since November 2012 (1.2% Y/Y from 1.6% Y/Y vs 1.4% Y/Y forecast). Cheaper food imports continued to be the main cause of the weak price growth, despite the relatively weak krone.
Rates
Quiet trading session on core bond markets
Global core bonds lost some ground today. The move already occurred in Asian dealings (US Note future) and the European opening (Bund). In the US, it was rather strange given the growing stand-off between US House and Senate Republicans on tax reforms. After the European opening, core bond trading occurred in a narrow sideways range. Yesterday’s sell-off in European stock markets and the Bund proved to be a one-off for now. The eco calendar was again uneventful. ECB Nowotny joined the German-Franco view that the ECB should have given an intent to end its QE-program rather than keeping it open-ended. A rate hike in 2018 is excluded with the current monetary policy stance, he added.
At the time of writing, the German yield curve bear steepens with yields 0.5 bps (2-yr) to 2.9 bps (10-yr) higher. The US yield curve shifts in similar fashion with yields 1.9 bps (2-yr) to 4.5 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spreads narrow up to 3 bps.
Currencies
EUR/USD drifts marginally higher
Trading on global markets calmed down after yesterday’s uptick in volatility. There were again only second tier eco data. There was also little guidance from interest rate markets or equities to guide trading in the major USD cross rates. EUR/USD held a tight range in the mid 1.16 area. USD/JPY hovered close to the 113.50 pivot. The dollar fails to regain yesterday’s losses.
Overnight, Asian equities mostly showed modest losses. China outperformed. Japan underperformed again. The yen maintained yesterday’s gain, but the Japanese currency again didn’t profit from the additional equity losses overnight. EUR/USD held near yesterday’s closing level in the 1.1650 area. So, the dollar remained slightly in the defensive.
European equity investors remained cautious after yesterday’s setback, but the pace of further losses was very modest. The Bund held an extremely tight sideways range. Interest rate differentials between the US and Europe re-widened slight after yesterday’s narrowing. This prevented further USD losses, but there was no sign at all of a meaningful comeback of the US currency. A downside attempt of EUR/USD early this morning had no momentum and EUR/USD settled in a tight range in the mid 1.1650 area. We look out for today’s close of in EUR/USD. A close north of the 1.1690 ST range top would be slightly disappointing for USD bulls. However, we don’t draw any firm conclusions yet. Next week, the US CPI and retail sales have the potential to give more meaningful guidance for USD trading. USD/JPY trades currently around 113.45. The pair failed to break beyond the 114.49/73 topside barrier. At the same time, the damage for the US currency could have been bigger given the easing in global risk sentiment.
UK data and cautious Brexit hope block sterling decline
Sterling traders saw the glass half empty earlier this week. Political uncertainty and the lack of progress in the Brexit talks were a good reason to reduce sterling long exposure. Today, the sterling glass was again half full. The UK trade deficit narrowed more than expected, supported by good export growth. At the same time, UK September production data were very strong (0.7% M/M vs 0.3% expected). Today’s data don’t change the overall picture on the UK economy, but they give some counterweight to other disappointing eco data of late(e.g. from the consumer sector). EU’s Barnier repeated after this week’s Brexit negotiations that more progress is still needed on the divorce issues. However, markets concluded that it is still possible to get the green light for negotiations on the future relationship after the December EU summit. There were ‘rumours’ that UK PM May would be prepared to raise the amount to UK is prepared to pay when leaving EU. EUR/GBP declined from late in the morning session and trades currently in the 0.8832 area (from around 0.8870/75 early this morning). Cable nears the 1.32 barrier. In a broader perspective, sterling stays in a ST consolidation modus, both against the euro and the dollar.
