Global core bonds suffer losses today with German Bunds underperforming US Treasuries following comments by ECB President Draghi. He strengthened language about building inflationary pressure compared to the ECB meeting two weeks ago by talking about a “relatively vigorous pick-up in underlying inflation”. The assessment on growth (ongoing broad-based expansion) remained unchanged. Draghi didn’t draw conclusions for monetary policy and repeated the current guidance. Up until his comments in European parliament, trading had been rather low-profile. Stronger-than-expected German Ifo business sentiment, Brent crude above $80/barrel and tonight’s start of the US Treasury’s end-of-month refinancing operation exerted some downward pressure, but moves remained limited with Wednesday’s FOMC meeting in mind. German yields add 3 bps (2-yr) to 5.2 bps (5-yr) at the time of writing with the belly of the curve underperforming the wings. The German 10-yr yield extensively tests that 0.5% resistance area. US yields add 1.7 bps (2-yr) to 2.4 bps (10-yr). 10-yr yield spread changes vs Germany hardly changed with Italy underperforming (+8 bps) ahead of Thursday’s 2019 budget proposal. The BTP rally since early September suggests that investors took a significant advance on a pro-European outcome (budget deficit around 1.6% to 2% of GDP).
Initially, there was again no single narrative to guide fx trading today. Trade uncertainty again got a bit more weight compared to the end of last week. This caused a cautious risk off bias. At the same time, safe haven bonds remained under slight downward pressure. One might assume that this might be due to investors taking a cautious approach going into the Fed on Wednesday. However, if so, it didn’t translate into a stronger dollar. EUR/USD tried a test of the 1.1725 area, but soon turned north again, supported by a better than expected Germany IFO. A second up-leg occurred as ECB’s Draghi spoke again hawkish on inflation pressures building up in EMU. Interest rate differentials narrow in favour of the euro. EUR/USD tries to regain the 1.18 big figure in a sustainably. The 1.1850 resistance (top of MT consolidation band) is within reach. USD/JPY shows a more benign trading pattern holding in the mid 112 area.
Today, there was still plenty of Brexit-noise. Last week, the EU summit revealed that the EU and the UK haven’t made much progress on Brexit. After the last week’s failure, pro-Brexit members in the UK conservative party are stepping up efforts to force PM May to give up the ‘soft’ Chequers proposal and replace it with more aggressive one. At the same time, the labour party is opening the way at least for a new people’s vote on the final Brexit deal. So, the visibility on the Brexit process and on its outcome is becoming very foggy. Today, traders shifted to some kind of wait-and-see bias awaiting the outcome of the internal debate in the government/conservative party. In technical trade, sterling regained part of Friday’s loss. However, the EUR/GBP downside was blocked by Draghi’s ‘hawkish’ comments this afternoon. EUR/GBP trades in the 0.8975 area. Cable even regained a full big figure (1.3150 area).
German business confidence decreases to 103.7 in September, from 103.9 in August, but beating market expectations of 103.2. The optimism from construction and retail companies withstands cautiousness from the manufacturing sector and export companies. Future expectations remain stable at 101.0, from 101.2 last month.
France’s budget deficit will increase in 2019 to 2.8% of GDP, compared to this year’s 2.6% deficit. According to Finance Minister Le Maire the increase will be temporarily and is due to slowing growth and exceptional items such as a changing tax regime. The larger deficit tightens president Macron’s room to push for European reforms.
In Sweden, Anders Norlen (Moderate Party) was elected to be the new speaker today. He will now get the first try at forming a government two weeks after the election proved to be successful for the nationalist Sweden Democrats. A vote of confidence on current Swedish Prime Minister Lofven will be held tomorrow morning.