Markets
US Mnuchin declining to confirm US/Sino trade talks in September and Navaro dampening prospects of a breakthrough in the short run dominated Asian trading hours. Stocks traded choppy, core bonds gained ground. Enter Gao. Asked about the recent twists in the trade conflict with the US, the Chinese Minister of Commerce said China has ample tools to respond to the new tariffs but thinks parties should first discuss removing them to prevent any further escalation. His comments suggest China isn’t planning to retaliate immediately, even though they announced to do so starting September 1st end of last week. It marked the start of an upleg in equities. UST’s reversed an intraday uptrend only to recover some of its losses on lower than expected Q2 core PCE figures (1.7% QoQ vs. 1.8% expected). US yields eventually added 1 bp at the short end of the curve while losing 1.4 bps at long maturities (30-yr). German yields jumped higher in a knee-jerk reaction on Gao’s comments but steadily lost all earlier gains amid weaker than expected August German inflation (-0.1% MoM, 1.0% YoY).
ECB President to be Christine Lagarde briefly added fuel to the fire by saying the central bank hasn’t hit the lower bound on interest rates. She added that current low rates do have implications for financial stability though. The German yield curve marginally steepens with the 2-yr yield losing 3 bps, no change in the 10-yr yield and +1.8 bps for its 30-yr maturity. Peripheral spreads decline a whopping 16 bps in Greece and 11 bps in Italy as PM Conte has been tasked to form a government with 5SM and Democratic Party. Italy’s 10-yr yield locks in yet another record low. EUR/USD continued an uninspired protracted downtrend today. The common currency did react on Lagarde’s comments by extending losses. EUR/USD is currently changing hands around 1.1060. USD/JPY advances to the low 106’s (106.34 at the time of writing) and erased earlier losses completely after China showed willingness to talk first before retaliating.
Sterling initially stayed under pressure following Boris Johnson’s decision to prorogue Parliament from September 12 to October 14. Sentiment turned a bit for the better soon with the pound strengthening back to opening levels. Moves were confined to a very narrow range however. EUR/GBP is trading at 0.907. Cable is drifting around 1.22.
News Headlines
German economy minister Altmaier proposed to cap the corporate tax burden at 25%, aiming to support the German SME’s (“Mittelstand”). According to Deloitte, Germany’s overall tax rate on companies is about 30%-33%. The plan is more evidence of Germany’s slow turn towards embracing fiscal stimulus to help the wobbling economy.
The ebb and flow in Sino-US trade headlines continues with China now indicating that it won’t immediately retaliate to the latest US tariff increase. A Ministry of Commerce spokesman said that the focus should be on removing announced tariffs that didn’t go in effect yet in order to prevent an escalation of the trade war.
The Hungarian forint dropped to an all-time low (331.39 against the euro currently) as the central bank clings on to a dovish policy stance, mentioning strengthening downside risks to the inflation outlook during its latest policy meeting. The combination with uncertainty surrounding trade and Brexit proves an explosive cocktail for the currency.
