- European equities extended their correction lower with main indices losing up to 1.25% (CAC 40) despite an empty eco calendar. US stock markets also opened in negative territory, but losses are modest (0.2%-0.3%)
- Catalonia’s deposed president Puidgemont said he might consider a solution to Spain’s political crisis that did not involve the region’s secession, appearing to soften the staunchly pro-independence stance that cost him his leadership last month.
- South Africa’s currency and government bonds came under heavy pressure, as the departure of a senior civil servant raised fears that supporters of the president were interfering with the Treasury’s operations to force through controversial spending measures. USD/ZAR rose above 14.50 for the first time this year.
- OPEC and non-OPEC oil producers are moving towards deciding at their Nov. 30 meeting whether to extend a global agreement to curb oil supply further into 2018, two ministers said, a quicker time frame than previously indicated. Brent crude trades stable around $63.5/barrel.
- The European Central Bank’s monetary policy must remain easy as inflation in the euro zone continues to lag its 2% target despite stronger economic growth and falling unemployment, vice president Constancio said.
- China’s new loans fell more than expected in October to their lowest in a year as banks tightened mortgage lending and corporates continued to shun bank loans, amid a continuing clampdown on risky shadow lending activities.
- The Belgian Debt Agency decided to cancel the last remaining OLO auction of the year which was scheduled for November 20, 2017, on the back of its reduced funding requirements. As such, the OLO issuance in 2017 will amount to EUR 35.55 billion.
Rates
Lackluster performance core bonds despite weak stocks
Global core bond trading was confined to tight ranges. An attempt to rise on weak stock markets (-1%) rapidly ran out of steam. As the US trading session gets going, the Bund even faces new selling pressure. All in all, it’s a continuation of the trends of the end of last week: core bonds can’t profit in a risk-off environment. Today’s eco calendar was empty and might have kept investors sidelined ahead of central bank speakers (ECB Draghi, Fed Yellen, BoE Carney and BoJ Kuroda; tomorrow) and key US eco data (CPI inflation, retail sales on Wednesday).
At the time of writing, changes on the German yield curve range between +0.2 bps (2-yr) and -1.1 bp (30-yr). The US yield curve flattens as well with changes varying between +0.6 bps (2-yr) and -2.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrow up 1 bp with Spain (-4 bps), Portugal (-6 bps) and Greece (-9 bps) outperforming. Catalan president Puigdemont suggested he is open to alternatives to Catalan independence.
The Italian debt agency successfully kicked off this week scheduled EMU bond supply by tapping the on the run 3-yr BTP (€2 bn 0.2% Oct2020), 7-yr BTP (€2.5 bn 1.45%Nov2024) and 15-yr BTP (€1.5 bn 2.45% Sep2033). The total amount sold was the maximum of the targeted €4.5-6 bn with a total auction bid cover of 1.56, which is good for Italian standards. The Belgian debt agency cancelled the last remaining OLO auction of the year (scheduled for Monday Nov 20) on the back of its reduced funding requirements. 2017 OLO issuance totaled €35.55 bn.
Currencies
USD/JPY and EUR/USD hold tight ranges despite risk-off
Today’s trading in EUR/USD and USD/JPY was quite similar to what happened at the end of last week. Equity sentiment remained risk-off, but core bond yields hardly declined. EUR/USD traded with a slightly positive bias intraday, but the 1.1690 resistance holds, for now. Ongoing high core yields also prevent substantial USD/JPY losses. The pair trades in the 113.35 area.
Asian equities traded mixed overnight. Chinese indices outperformed. Most other indices showed small losses with Japan underperforming. The yen again hardly profited from risk aversion in Japan. USD/JPY held in the mid 113 area. The dollar was slightly better bid early in the session, but there was no clear trend. EUR/USD didn’t go anywhere, hovering in the 1.1650 area.
There was no high profile story to guide trading on the European markets. European equities opened little changed, but sentiment gradually turned risk-off. The slide on the equity markets didn’t help core bonds much, as was the case last week. An attempt of the bund to rally stalled. Long term interest rate differentials again narrowed slightly in favour of the euro. Changes in EUR/USD remain modest (currently 1.1665/70 area), but the pair again neared the 1.1690 minor resistance. The ongoing resilience of core yields despite the intraday risk-off still prevents any meaningful gains of the yen. USD/JPY trades in the 113.30 area. EUR/JPY (132.20) is holding a tight range in the 131.40/133.15 range.
Political uncertainty dominates GBP-trading
Sterling came under pressure as UK political risk dominated the headlines. Press articles during the weekend indicated that a growing number of Conservative MP’s is supporting a call to vote on PM’s May leadership. This was one of many illustrations on the deep division within the Conservative party at a key juncture in the Brexit process. Tomorrow, the UK Parliament will start the examination of the Brexit Withdrawal Bill. At the same time PM May remains under pressure to make progress in the negotiations with the EU. Sterling came already under pressure this morning in Asia and the move was extended during the European morning session. EUR/GBP regained a minor resistance area in the high 0.88 area and settled north of 0.89 (currently 0.8910). Cable dropped to the 1.3062 area, but the ST range bottom (1.3040/27) was left intact. A break below this level, would worsen the picture for sterling and could also spill over to other cross rates. Cable (currently 1.3085) trades off the intraday lows due to USD softness, but the picture of sterling remains fragile.
