Global core bonds are mixed today with US Treasuries outperforming German Bunds. Calm returned to markets after the Brexit storm of yesterday. Core bonds opened neutral. Risk sentiment improved overnight, with WS and Asian equity markets gaining ground. European equity markets opened with gains as well but gradually edged lower throughout the day to eventually sink well below zero. German Bunds moved little higher. ECB president Draghi repeated that the Eurozone economy has lost some momentum but said the growth slowdown is only temporarily. US eco data were of second-tier nature and had little impact on trading. Industrial Production grew slower than expected in October with 0.1% (m/m), coming from a downwardly revised 0.2% in September. The speeches of Fed VP Clarida and governor Kaplan got more attention, pushing US Treasuries up. Clarida warned for the slowdown in global growth. He doesn’t expect a big pickup in inflation next year but said the Fed policy rate is certainly not at neutral yet. Kaplan said that the current tailwind from Trump’s fiscal policy could turn into headwind, once the sugar rush has phased out. Losses across the US curve varied from -0.6 bps (30-yr) to -4.6 bps (5-yr). German yield curve moves are limited between -0.1 bp (2-yr) and +0.5 bps (10-yr).

Equity markets suffer losses against the backdrop of today’s fragile/negative risk climate. The dollar however (again) fails to profit sustainably as has been the case quite often recently. The greenback faced some moderate intraday swings as currency traders lacked clear guidance. Things changed following Fed Kaplan’s and especially Clarida’s soft interpreted interviews. With Powell’s first ever comment yesterday about slower growth abroad and a waning fiscal boost still fresh in mind, it was enough for markets to ditch the dollar. Mixed US production data were no support for USD either. EUR/USD rebounded sharply from near intraday-lows around 1.132. At the time of writing the currency pair is testing the 1.14 mark (1.141). USD/JPY slid back below 113, at around 112.70.

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After yesterday’s knockout blow, sterling entered calmer waters and traded in a narrow range. Markets are currently trying to assess what the latest disastrous Brexit developments mean going forward. In the next few days May will try to persuade MP’s of all factions to back the current deal. It remains highly uncertain however, if she will ever have the numbers. Markets also ponder the several scenarios that are back on the table (general elections, second referendum, a no deal or no Brexit at all). Each with a materially different impact and an increased likelihood compared to just a few days ago. Investors are in a wait-and-see mode as these dark Brexit clouds block the view of the near future. In an intraday perspective the pound, if anything, reversed earlier modest gains on several news headlines suggesting the quote (48 letters) to trigger a no confidence vote might have been met. EUR/GBP is currently trading at 0.886, virtually unchanged from yesterday’s close. Sterling edged higher vs. the dollar. Cable is changing hands at 1.287, supported by a softer dollar.

News Headlines

Fed speakers’ warnings on slowing growth abroad gain traction with vice-chair Clarida and Dallas Fed Kaplan joining Fed chair Powell and Atlanta Fed Bostic earlier this week. Clarida and Kaplan added that they don’t expect a strong uptick in domestic inflation. Both agree though that the Fed is still some rate hikes away from entering neutral territory. Growth warnings suggest that a pause in the quarterly rate cycle can occur somewhere in 2019.

ECB’s President Draghi explained in greater detail why the ECB still expects a vigorous acceleration in core inflation ahead. He labels the 2018 growth slowdown as temporary in nature, referring to one-off factors such as a disruption in the car sector and a return to normal of trade growth following an exceptional 2017.


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