The disconnection between global markets was rather big today. The main move probably occurred on stock markets with most European indices eking out gains of up to 1% in line with Asia this morning. The EuroStoxx 50 returned north of 3500 for the first time since early August. Key resistance stands at 3573.57, the highest of a multiple top formation.

News flow around the Sino-US trade conflict was positive with China for example announcing a range of US goods which will be exempted from 25% extra tariffs. The other “main” beneficiary from positive risk sentiment was USD/JPY. The pair yesterday broke through 106.78/107.21 resistance, paving the way for return action towards the 109 area. USD/JPY currently changes hands around 107.80 (up from 107.54).

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Moves on core bond markets, where most of the action happened over previous days, were muted today. Both the Bund and US Note future currently trade near opening levels with a slight underperformance of the US Note future. Tonight’s $24bn 10-yr Note auction probably has something to do with it. US yields add 0.3 bps (2-yr) to 1.4 bps (10-yr). Changes across the German curve are smaller than +- 1 bp. 10-yr yield spread changes vs Germany are insignificant.

Another market which isn’t willing to comply with positive risk sentiment today is EUR/USD. The pair currently trades near 1.10 from a 1.1043 open. US August (core) PPI data rose more than expected, but the dollar was already storming ahead before the data release.

US money markets are scaling back some ultra-easy policy bets in line with general doubts that markets were running ahead of themselves with ECB easing expectations. This trade is at odds with US President Trump’s thinking who called on the “boneheads” from the Fed to lower rates to zero or lower. Anyway, focus turns to tomorrow’s ECB meeting now with the central bank probably lowering its deposit rate, extending the lower for longer promise but refraining from taking additional unconventional steps like asset purchases.

EUR/GBP traded with a small downward bias. The pair tested the recent low just north of 0.89. Scotland’s highest court rule PM Johnson’s prorogation unlawful, but didn’t order a recall of MP’s ahead of UK Supreme Court ruling next week.

News Headlines

Law and Justice Party (PiS) in Poland approved the suspension of parliament starting from tomorrow until after elections held on October 13. The parliamentary year was due to end on Friday anyway. But by suspending rather than terminating the session, PiS ensures that the outgoing parliament can reconvene after the elections but before a new government is formed. The opposition accuses PiS of using that window to push through last-minute bills.

Spain’s far-left Podemos leader Iglesias called on acting PM Sanchez to hold new talks during a parliamentary debate today, saying that both parties should hold discussions based on the concessions they have done. Previous talks had failed over Podemos’ demands for cabinet posts. If there’s no agreement on forming a government by September 23, new elections would be held on November 10.

The German IFW Institute cut its growth forecast for this year from 0.6% to 0.4%. GDP likely shrank by 0.3% Q/Q in Q3, putting the country in a technical recession. The Berlin-based DIW Institute slashed forecasts as well, to 0.5% in 2019 and 1.4% in both 2020 and 2021. They calculated that a no-deal Brexit would slice 0.4% percentage points off 2020 German growth.


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