Global core bonds are little changed from yesterday with general risk sentiment stabilizing. German Bunds fell lower at openings as it played catch-up with the overnight movements in US Treasuries, but paired the losses throughout the day to even gain some ground. Treasuries first lost some ground but are currently trading at negligible losses. Global core bonds mirrored sentiment on equity markets. European indices recovered from losses in the last couple of days and edged up with modest gains ranging around 0,5%. US equity futures hinted a continuation of that sentiment and eventually opened in dark green. After Trump lashed out at the Fed, Treasury Secretary Mnuchin said Fed chairman Powell is doing a good job. He sees normalization in the yield curve. EU-Italy bickering continued. European Commission President Juncker said Italy is not keeping its word and that the country already received some “flexibility” from the Commission. Italian BTP futures gain some ground. The German yield curve edges lower. Yield changes range from -1.4 bps (30-yr) to -2.0 bps (5-yr). US yield curve moved north but remained close to unchanged. Moves range from +0.45 bps (20-yr) to +0.7 bps (30-yr). Italian 10-yr spread vs Germany closes 2 bps. Portuguese (+ 3bps) and Spanish (+4 bps) spreads widen over Germany.
This morning, Asian equities rebounded and European equities entered calmer waters, too. Eco data were second tier had hand no big impact on global FX trading. Of late, the status of the dollar in the global FX framework become a bit misty. The dollar wasn’t able anymore to play its safe haven role as higher US yields triggered an outright risk off correction on global markets, including on US equities. In this context, what will be the reaction function of the dollar in case of risk-on rebound (or in case of further turbulence). Markets clearly haven’t found out yet. EUR/USD tried to regain the 1.16 barrier this morning, but the move stalled. The pair settled in the upper half of the 1.16 big figure. The dollar gained some traction as US traders got involved. US bank earnings published today mostly were stronger than expected. Fed Evans in an interview indicated that the Fed interest rate approach remains on track and that raised might need to be raised above neutral. A solid equity performance and the Evens’ comments are slightly USD supportive. EUR/USD trades in the 1.1560 area. USD/JPY hovers in the lower half of the 112 area.
Recently, there were ever more rumours that the UK and EU were very close to reaching a Brexit deal, including some kind of backstop for the issue of the Irish border. The hope on a Brexit deal before October 17 EU summit triggered a cautious comeback of sterling. EUR/GBP dropped to the 0.8725 area earlier this week. Yesterday and today, the rally slowed. Headlines on a possible deal persisted, but the risk of discord within May’s government returned to the forefront, preventing further GBP-gains. This debate whether the glass is half empty rather than half full will probably continue into this weekend. In this context of lingering uncertainty, the rebound of sterling stalled. EUR/GBP trades currently in the 0.8765 area. Cable hovers near the 1.32 pivot
In the wake of recent comments from President Trump on monetary policy, Chicago Fed’s Evans said he is looking at a very strong economy, strong fundamentals and that the Fed is adjusting the policy stance. Evans said that the Fed may need to raise the policy rate 50 bps above neutral. He estimates neutral rate to be in the 2.75%-3.0% area.
Andrew Branson, the US pastor that has been detained in a Turkish prison cell for the last months, was convicted by a court, but is freed on time served in Turkey. The Turkish lira rallied already earlier today as officials had indicated that a positive outcome was possible. EUR/TRY trades currently in the 6.83 area.