- European equities gain up to 1% today, rebounding following a 7 day sell-off. US stock markets opened around 0.5% higher.
- ECB Executive Board member Mersch said in an interview with CNBC that financial markets wouldn’t be right to expect another extension of asset purchases after September.
- UK retail sales fell for the first time since March 2013 in the 12 months to October (-0.3%), but the figures were still stronger than economists had forecast. The M/M statistics look brighter: total volumes rose 0.3%, or 0.1% excluding the volatile automotive fuel component. That beat expectations for a rise of 0.1% and no change, respectively.
- A Brexit transition deal is in everyone’s interest but the Bank of England will support the economy no matter what the result of the negotiations, BoE Governor Carney said in an ITV television interview.
- The Republican-controlled US Congress was approaching a major test later today of its ability to overhaul the federal tax code, as lawmakers prepared for their first full-scale vote on sweeping tax legislation.
- The number of Americans filing for unemployment benefits unexpectedly rose last week to 249k in part as a backlog of applications from Puerto Rico continued to be processed, but the underlying trend pointed to tightening labor market conditions. The Philly Fed Business outlook declined more than forecast, from 27.9 to 22.7 (vs 24.6 expected). Industrial production rose a strong 0.9% M/M in October, beating 0.5% M/M forecast.
Rates
Bonds lose slightly ground as risk sentiment improves
Global core bonds lost ground during Asian trading and in the first half of European dealings as risk sentiment improves. Following a 7-day sell-off and a test of key support in eg the German Dax, stocks found their composure and rebounded. Positive risk sentiment weighted on the US Note future and the Bund. The equity rally stalled around European noon, putting a bottom below core bonds. The German Bund even started outperforming the US Note future, erasing most of the intraday losses. US eco data printed mixed, but once again failed to move markets. ECB Mersch said that markets shouldn’t anticipate APP to be extended beyond September 2018, clearing a misunderstanding which originated at Draghi’s press conference after the October meeting. ECB Praet was dovish as usual. The US House is expected to vote on its tax reform proposal a first time tonight which remains a wildcard.
At the time of writing, the US yield curve shifts 2.1 bps (2-yr) to 2.7 bps (30-yr) higher, slightly bear steepening the curve (hopes on tax reforms?!). Changes on the German yield curve range between -0.8 bps (30-yr) and +0.4 bps (2-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -1 bp and +1 bp with Greece underperforming (+11 bps).
The French treasury held a small OAT auction by tapping two off the run (€ 1.02 bn 3.5% Apr2020 & €1.46 bn 0.5% May2025) and one on the run (€2.52 bn 0% Mar2023) bond. The amount sold was the upper bound of the indicative €4-5 bn range. Demand was very strong, resulting in an auction bid cover of 2.72. Additionally, the French treasury raided €2 bn via inflation-linked notes.. The Spanish debt agency sold 4 on the run bonds (€1.02 bn 0.05% Jan2021, €0.97 bn 0.45% Oct2022, €1.24 bn 1.45% Oct2027 and €1.43 bn 3.45% Jul2066). The combined amount sold (€4.65 bn) was in the upper half of the €4-5 bn target range with good auction bid cover of 1.92.
Currencies
Dollar off recent lows, but gain still far from impressive
An improvement in global risk sentiment and a rise in core yields supported a modest USD rebound, confirming yesterday’s intraday trend-reversal. (US) data were mixed and had no significant impact on trading. EUR/USD trades in the 1.1775 area. USD/JPY changes hands near 113. The dollar trades off yesterday’s lows, but the US currency has still a quite a long way to go to reverse the losses it occurred since the middle of last week.
Asian risk sentiment improved this morning as the downward correction of the previous days lost momentum. Most regional equity indices showed moderate gains with Japan outperforming. USD/JPY tried to regain the 113 level. EUR/USD was little changed from yesterday’s close and traded in the high 1.17 area.
European equity indices joined the risk-on correction from Asia. Core yields rose and, contrary to what was often the case of late, US Treasuries underperform Bunds, (slightly) widening the interest rate differential in favour of the dollar. EUR/USD drifted to the 1.1760 area. USD/JPY gained a few more ticks north of 113. The dollar was in better shape compared to earlier this week, but the gains remained modest given the recent setback. ECB Praet defended the gradual ECB policy approach despite solid EMU growth. There was no noticeable negative impact on the euro. The early morning US data (import prices; Philly Fed and claims) were slightly below consensus, but the rise in the jobless claims may be partly due to statistical issues (Veterans day). Still the dollar lost a few ticks. Later in the session, the US production data were very strong, but again with little (positive) impact on the dollar. The US House and the Senate are developing parallel proposals on US tax reform, but it remains uncertain whether they will lead to a workable combined result in the end. EUR/USD trades currently in the 1.1775 area. USD/JPY trades near 113.
EUR/GBP 0.90+ test rejected
EUR/GBP traded off yesterday’s top early in Europe. The pair hovered in the mid 0.89 area going into the publication of the October UK retail sales. The UK currency was supported by the better overall risk sentiment. Yesterday’s potential trend reversal signal in EUR/GBP (and in EUR/USD) also weighed on the euro cross rates today. The UK retail sales were marginally stronger than expected at 0.3% M/M. Still, the series printed the first negative Y/Y reading since 2013 (-0.3%). EUR/GBP initially hardly reacted to the report, but sterling finally gained slightly further ground, especially against the euro. Some press headlines indicating that UK and EU (German) politicians acknowledge the need for an orderly, well-organised Brexit may have been slightly supportive for sterling. Investors don’t want to be positioned aggressively sterling short as more constructive Brexit news remains possible. EUR/GBP trades currently in the 0.8920/25 area. The topside test looks rejected for now. Cable (1.3190 area) holds with the sideways consolidation pattern.
