Markets
Risk assets thrived during yesterday’s European trading session following last week’s sell-off. The weekend didn’t bring unexpected bad news, while Italy survived S&P’s downgrade threat, at least for now. Italian assets outperformed with the 10-yr yield spread vs Germany narrowing by 13 bps. European stock markets flourished while US indices faced more difficulties to cling to opening gains. Those gains even turned into new heavy losses after US President Trump reiterated his plan again to impose duties on all remaining Chinese goods if his talks with Xi Jinping fail next month. US stock markets closed 0.66% (S&P) to 1.63% (Nasdaq) lower. German Bunds underperformed US Treasuries. The German yield curve bear steepened with yields increasing by 0.8 bps (2-yr) to 3.9 bps (30-yr). US yields added 0.9 bps (10-yr) to 2 bps (30-yr). USD/JPY clung to most intraday gains, closing the session at 112.37 from 111.89. EUR/USD hovered volatile in the high 1.13 region, but dollar strength eventually prevailed (1.1373 close from 1.1407). EUR/GBP treaded water in the high 0.88 area. Brazilian assets fell prey to buy-the-rumour, sell-the-fact following Bolsonaro’s presidential election victory.
Risk sentiment improved again overnight with Asian bourses up to 1.5% higher. Korea, Japan and China outperform (+1.5%). US President Trump eased yesterday’s rhetoric by speaking about a great deal with China on trade. Chinese markets received an additional push in the back as the regulator revealed plans to guide more long term capital into the stock market. The trade-weighted dollar (96.7) remains upwardly oriented, closing in on the 2018 high (97). USD/CNY reaches a decade high, just below 7. EUR/USD changes hands around 1.1375. The US Note future slides lower, suggesting a weaker opening for the Bund as well.
The eco calendar is interesting with EC confidence data, EMU Q3 GDP, German inflation numbers, US S&P housing data and US consumer confidence. The bar for Q3 GDP (0.4% Q/Q) might be too high. EMU data will be put against Draghi’s last week’s comments that the economy is currently losing some momentum, but that it isn’t a downturn yet. German inflation is expected flat on a monthly basis following last week’s 0.4% M/M leap. US housing data could show more signs of cooling off and might start worrying some investors. Consumer confidence is estimated to come off the cycle high reached last month, which shouldn’t surprise given recent market volatility. It’s hard to estimate the impact of this complex of eco data. On top, they’ll probably be in the shadow of general risk sentiment on stock markets. We expect Europe to extend yesterday’s positive spell, pulling bonds lower as well. Dollar strength remains name of the game on FX markets. Q3 earnings by several companies including Facebook (after market) are a wildcard. Sterling remains slightly in the defensive going into Thursday’s BoE meeting. There’s no market-moving update on Brexit. Yesterday’s budget release by Chancellor of the Exchequer Hammond went unnoticed.
News Headlines
Valdis Dombrovskis, EC VP and responsible for financial regulation, pledges access for EU companies to UK clearing houses in case of a no-deal Brexit. The vow comes after EU banks warned that EU companies would otherwise face hefty rises in trading costs and would be unable to hedge certain market exposures.
The Chinese securities regulator said in a statement that it would encourage share buybacks and M&A’s by listed companies. In addition, it will reduce trade resistance and increase market liquidity. The measures are the latest bid by officials to shore up the market after a steep sell-off in equities as well as a slowing economy.
US President Trump has said he will make a great deal with China. He added that it must be great since China has “drained our country”. Earlier in the day, it was said that US officials are working on a tariff list with all remaining $257bn of Chinese imports to target if talks next month between Trump and Xi Jinping would fail.
