Global core bonds are little changed today with moves rather subdued on a low volume trading day. German Bunds outperformed at the opening, but soon paired gains. Both German Bunds and US Treasuries are hovering near opening levels. The relative weight of economic events today is meagre in comparison to what is coming in the next days. Investors await the US midterm elections of tomorrow. The most likely scenario (Democrats retake majority in the House, Republicans strengthen position in the Senate) promises to deliver a muted market reaction. The Federal Reserve meets on Wednesday, though no noteworthy changes are expected. The US Treasury sells 3-year notes tonight. There are no European data to steer trading. Italian BTP Futures lost some ground after the opening, but without any material news. The move may reflect some positioning ahead of the Eurogroup meeting of Finance Ministers today where Italy’s budget will be discussed for sure. In the meantime, European Commission Vice President Dombrovskis repeated that the Italian budget needs substantial adjustments but that both parties are continuing negotiations ahead of Italy’s budget deadline next Tuesday. BTP’s trade at the time of writing back at opening levels. The US yield curve edges lower at the time of writing with changes ranging between -0.1 bp (2-yr) and -1.7 bps (10-yr). The German yield curve flattens slightly with yield changes varying between -0.5 bps (30-yr) and +0.2 bps (2-yr). Yield spreads versus Germany remain quasi unchanged.

Trading in the major USD cross rates was mainly technical in nature today as most investors were reluctant to place directional bets ahead of  the outcome of the US mid-term elections and the Fed policy decision later this week. EUR/USD initially traded with a cautious negative bias. Uncertainty on the next steps in the budget discussion between the EU and Italy maybe were a slightly negative for the euro (Italian bonds were also under light pressure this morning). However, as was the case after the payrolls on Friday, negative news from Europe or positive news from the US still wasn’t able to push EUR/USD back to 1.13 key technical support. The pair even reversed earlier losses early in US dealings this afternoon. EUR/USD is again coming close to the 1.14 barrier going into the publication of the US non-manufacturing ISM. USD/JPY also showed a small intraday loss of momentum and trades in the 113.15 area. USD traders basically are in wait-and-see modus awaiting upcoming (potential) event risk.

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Sterling traders/investors continued to see the glass half full today. A series of positive Brexit headlines at the end of last week and during the weekend, were again a good enough reason for markets to turn more cautious on sterling shorts. In this respect, markets even ignored a weak UK services PMI. The index in the key services sector unexpectedly dropped from 54.1 to 52.1. This at least doesn’t match with the risk of an economy potentially nearing the status overheating that some BoE MPC members fear in case of an orderly Brexit. However, sterling trading is still mainly driven by Brexit sentiment/rumours and markets currently are handling those rumours with a positive bias. EUR/GBP is currently trading in the 0.8750 area. Cable hovers in the 1.30 area.

News Headlines

The US administration has announced, as expected, it will exclude eight countries from the Iranian oil sanctions that started this morning. The most important country among the exemptions is China. The group of eight is allowed to continue limited oil imports from Iran for the next six months. Iran is estimated to miss out on $2.5bn oil revenues.

Leo Varadkar, Ireland’s premier, has told UK PM May he is open to a “review” of the Irish border backstop in an effort to overcome deep divisions in Brexit talks. Previously, Varadkar had rejected suggestions made by Brexit secretary Dominic Raab to implement a three-month limit on the backstop.

US ISM Non-Manufacturing Index decreased less than expected in October to 60.3 from the 61.6 in September. Markets were expecting a stronger decrease to 59.0. The Markit/CIPS Services PMI in the UK decreased from 53.9 last month to 52.2 in October, which is a larger fall back than forecasted.


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