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Fundamental Analysis

No Impact from Formal Brexit Start on Sterling

Typography
  • A rebound in technology shares set US equity indexes on course for fresh records. European equities rose after French president Macron won a free hand to drive through economic reforms. The pound edged higher and the euro was steady as Brexit talks began.
  • In Asia, the focus tomorrow will be on the MSCI Inc. decision on whether to include China A-shares in its global indexes. The past three years, the decision was delayed because of regulation and accessibility worries for global investors. For China, acceptance by MSCI marks a key step to open up its financial markets and attract foreign capital.
  • The Aussie dollar declined slightly today after Moody's cut the ratings of the Big Four Australian banks. Moody's cited elevated risks in the housing sector that heighten the sensitivity of the banks' credit profiles to an adverse shock. According to the RBA, the nation's household debt-to-income ratio climbed to a peak of 189%.
  • NY Fed Dudley said he's confident that the expansion has a long way to go, that confidence is "very, very high" and that the economy is close to full employment. He said inflation was a little lower than the Fed would like but seemed not too concerned. He also sees wage growth quickening in the future as the job market tightens further.
  • The Brexit talks finally began today amid confusion on what exactly the U.K. government wants from the divorce.

Rates

Core bonds open the week in slow-motion

Core bonds initially held a sideways trading pattern in a risk-on environment, but some modest, gradual erosion occurred during European afternoon. The calendar was razor-thin, but "hawkish" comments of NY Fed Dudley temporarily accelerated the decline in the US Note future (see graph). The move in the Bund didn't go far. We wouldn't draw conclusions of today's session, given the lightness of the calendar and the low traded volumes.

The US curve bear flattened with yields up to 2.8 bps (2-yr) higher. German yields increased by 0.1 bp (2-yr) and 1.4 bps (5-yr). Intra-EMU spreads versus Germany (10-yr) narrowed again following a one day interruption on Friday. The narrowing amounted 2-to-4 bps for the periphery, with Portugal outperforming (-6bps) after Fitch upgraded its rating outlook to BB+ positive.

NY Fed Dudley, a key member of Fed chairwoman Yellen's inner circle, sounded rather hawkish. Dudley, who has a rather dovish profile, said inflation was a little lower than the Fed would like. That suggests that he isn't overly concerned about it. In the same vein, he said the labour market is doing relatively well and "confidence is very, very high". He sees wage growth quicken as conditions on the job market tighten further and is confident that the expansion has quite a long way to go.

The Belgian debt agency started this week's scheduled EMU bond supply by tapping three on the run OLO's: OLO 82 (€0.93B 0.5% Oct2024), OLO 81 (€1.33B 0.8% Jun2027) and OLO 78 (€0.93B 1.6% Jun2047). The combined amount sold (€3.19B) was near the maximum of the target range (€2.7-3.2B) with an auction bid cover of 1.59, which in line with this year's average. Belgium now raised €24.82B (71%) of this year's €35B OLO funding need.

Currencies

USD gains marginal ground in dull session

Trading in the major FX cross rates took a very slow start to the new week. The swings of EUR/USD and USD/JPY were negligible in the morning session. The dollar was slightly better bid in the US session, but the moves remains technically insignificant. EUR/USD hovers in the 1.1180 and USD/JPY in the 111.25 area.

Overnight, Asian equities eked out moderate gains, without a specific trigger to explain the risk-on sentiment. The correction of tech stocks that spooked markets last week, has apparently run its course. The positive risk sentiment barely helped the dollar. USD/JPY held close to 111 and EUR/USD near 1.12.

European equities were also captured by a strong risk-on sentiment. Positive spill-overs from Asia and, to a lesser extent, the France election outcome, were the drivers of the risk rally. However, the impact on interest and on the major dollar cross rates was minimal. Both EUR/USD and USD/JPY hardly deviated from 1.12 and 111 respectively.

With no eco data on the agenda in the US, there was no meaningful change of the script this afternoon. The US equities joined the broader risk rally. US interest rates and the dollar gained marginal ground after comments from Fed's Dudley. He was positive on US economic growth and expects that the US expansion has a long way to go. USD/JPY trades in the 111.30 area. EUR/USD slipped to the 1.1175/80 area. Even so, the moves remain technically insignificant.

No impact from formal Brexit start on sterling

UK's Brexit Minister Davis and EU's Barnier gave the formal kick-off for the negotiations of the divorce between the EU and the UK. The impact on sterling trading was limited. The UK currency regained slightly ground today. The first official remarks of UK's Davis were reconciliatory. This creates the impression that the UK aims a softer Brexit than expected before the UK election. However, such a conclusion remains premature as the domestic political situation in the UK remains highly uncertain. EUR/GBP trades in the 0.8750 area. Silvana Tenreyro was appointed to the BoE MPC. She will replace Kristin Forbes. For now, we didn't see much info on her potential voting intentions.

Author: KBC BankWebsite: https://www.kbc.be/dealingroom
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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