Core bond markets traded very subdued today. The German Bund and US Treasuries both were slight upwardly oriented, though under low volumes. Investors await key data (EMU PMI’s, US GDP) and events (new British PM, ECB) to unfold later this week. Markets didn’t even flinch after president Trump unleashed a new Twitter storm against the Fed, saying they “missed it (big)” by having “tightened far too much and too fast”. On the trade front, Chinese media reported that Mnuchin and Lighthizer are likely to visit China next week. Equities profited but the impact on bonds was negligible. Treasuries eventually outperformed Bunds as early US buying kicked in. The US yield curve bull flattened with yields changing from -1 bps (2-yr) to -2.4 bps (10-yr). German yields were unchanged (2-yr) to 2 bps lower (10-yr). Peripheral spreads widen with Italy (+6 bps) again underperforming amid rising political tensions. Lega’s Salvini is rumoured to make or break the ruling coalition this week. Belgium successfully tapped the bond market, raising 1.2bn via 10-yr bonds at an all-time low and negative yield of -0.038% and a bid-to-cover of 1.42. Its 2033 auction (0.78bn) printed at 0.255% with 2.14 bid-to-cover. The spread vs. Germany’s 10-yr yield widened a marginal 1 bp.

The dollar maintained Friday’s gains as markets see a 25 bp rate cut as the most likely outcome after assessing the last indications from Fed sources before the start of the blackout period for Fed communication on monetary policy. For now, there are few additional follow-through gains for the USD currency. EUR/USD and USD/JPY didn’t break any important technical support/resistance levels yet. Sentiment on risk improved on headlines that US-China trade talks are developing in an improved atmosphere, but there was no clear directional impact on the dollar. At the same time sentiment on the EUR/USD cross rate remains rather dented. Investors apparently remain cautious on euro long exposure as they ‘fear’ the ECB might err to the dovish side with even an outside risk of a rate cut already at this week’s policy meeting. EUR/USD came within reach of the 1.12 level, but a real test/break still didn’t occur yet (currently 1.1215/20 area). USD/JPY is struggling to regain in  108 big figure.

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Sterling selling resumed today after a modest rebound at the end of last week. UK Foreign Office Minister Duncan resigned in anticipation of the change in leadership on Wednesday. Several other ministers are also expected to quit if Boris Johnson, as expected, becomes PM as he said that ministers should be prepared to accept leaving the EU without a deal. EUR/GBP rebounded back toward the 0.90 barrier this morning. Political uncertainty continues to dominate sterling trading, but the economic picture might also become a further sterling negative. The NIESR think tank in a new update on the UK economy said that there is already a one-in-four chance that the UK entered a technical recession and NIESR predicts a severe downturn in case of a disorderly no deal Brexit. EUR/GBP currently hovers in the 0.8990 area.  Cable eased to currently trade in the 1.2480 area.

News Headlines

There is a 1 in 4 chance that Brexit has already pushed the UK into a recession, Niesr said today. The UK think tank added that it sees a possibility of a “severe” downturn in the event of a disorderly no-deal Brexit. Its central forecast is still based on a smooth Brexit however, which would leave the economy with a 1% growth both in 2019 and 2020.

EU officials said the bloc plans to drag out trade talks with the US by making limited concessions on less important matters until the current administration turns its focus on the 2020 re-election bid. The closer Trump gets to the presidential voting, the less inclined he might be to trigger a full blow trade war with Europe.


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