On Friday, price action on US and EMU bond markets was mainly driven by US labour data and noise on the Italy budget. The payrolls showed ongoing US labour market strength, with data in line with expectations. US Treasuries initially gained limited ground after the payrolls, but resumed their down trend later. Both the US and EMU yield curves bear steepened. Regarding Bund trading, the EU and Italy still haven’t found an agreement on how much the Italians can spend over the next three years. Even so, the Bund followed to a large extend the underlying trend from the US this time. The US Treasury market is closed today (Columbus day), but equity markets remain open Yesterday, the People’s Bank of China cut banks’ reserve requirement ratio again for the fourth time this year by 1 percentage point. The central bank eased monetary policy this year as its economy is losing momentum. The PBoC policy decision and solid PMI’s couldn’t offer rebuttal for Chinese markets as they re-opened after a week-long holiday. It made a catch-up for last week’s worsened sentiment and opened substantially lower. The CSI 300 Index loses more than 3%. Today’s eco calendar is rather thin, as it is the case for the rest of the week. US inflation numbers on Wednesday/Thursday can attract investors’ attention. Third-quarter earnings season have started with the first companies reporting results this week.

On Friday, the dollar traded with a tentative positive bias going into the publication of the US payrolls. The report confirmed an ongoing healthy labour market. The unemployment rate dropped to a multi-decade low of 3.7%. Key average hourly earnings were as expected (2.8% Y/Y). The report was close to expectations. Later in the session, US yields touched new cycle highs, but that hardly helped the dollar. EUR/USD closed marginally stronger at 1.1524. USD/JPY struggled not to lose further ground as sentiment on risk remained negative (close at 113.72). Today, activity on US markets will be subdued in observance of Columbus Day. Sentiment in Asia remains risk-off as Chinese investors return from a holiday week. The PBOC eased monetary conditions (RRR). The yuan and other regional EM currencies stay in the defensive. This context favours the dollar. There are few European data. Headlines on Italy remain a wildcard. EUR/USD last week dropped temporary below the 1.15 support, but the payrolls were not able to force a sustained break. Even so, we continue to give the dollar the benefit of the doubt. A technical setback to the 1.13 area remains possible.

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On Friday, sterling extended the comeback that started after the conservative Party meeting. EU diplomats again struck a positive tone indicating that a deal was possible/close. A new squeeze of sterling shorts pushed EUR/GBP below the 0.88 area. Over the weekend, comments from EU policy makers try to support the constructive narrative (intentions to offer the UK a ‘super-charged’ free trade deal). Investors apparently don’t want to be positioned too much short sterling going into a key phase of the talks. On the other hand, it is unsure whether any EU-UK deal will be able to convince hard-line Brexiteers in PM May’s party. Even so, for now, sterling gets the benefit of the doubt.

News Headlines

China’s central bank (PBOC) eased monetary policy further this weekend by cutting the reserve requirement ratios for most commercial banks by 1% point. With the move the PBOC seeks to increase liquidity in China’s banking system to support business’ financing.

Brazil’s far-right election candidate Bolsonaro has won the first round of the presidential election, securing roughly 46% of the votes. As more than 50% of the votes were needed to secure an outright victory, Bolsonaro now faces rival contester and leftist Fernando Haddad (nearly 29% of the votes) in a second round on October 28.

Oil prices dropped as hopes for US exemptions on the Iranian oil boycott rise. The US is said to be in talks with countries that want to continue to buy Iranian oil after American sanctions are (re)imposed on November 4. Saudi Arabia also hinted it can ramp up oil production with its “if the markets needs that”.


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