The global ‘reflation rebound’ of risky assets continued in Asia and Europe this morning. Markets see even more signs of an attitude of reciprocal good-will  between the US and China. China encouraging local companies to buy US farm products and the country exempting some US goods from higher import tariffs reinforce investors’ hope that both countries might at least try to reach a partial/limited agreement next month. The ‘risk-on’ supports the recent rise in core (US & European) yields. In Europe, the internal division within the ECB on the need for yesterday’s ECB stimulus package came again to the forefront. Dutch ECB member Knot called the ECB package ‘disproportionate to the economic conditions’. Austrian ECB member Robert Holzmann suggested that yesterday’s decision might be a ‘mistake’. Remarkably, he also questioned the ECB forward guidance as he suggested that this guidance it ‘isn’t there for the next decades’. Finish ECB Member Rehn, on the other hand, supported the ECB policy package. The bickering had little direct impact on interest rate markets. Even so, core yields keep their upward tendency. US bonds even underperformed as US retail sales met market expectations (0.3% M/M control group series). Given the strong momentum over the previous months, the report confirms that the US consumer remains in very good shape with probably another strong contribution of private consumption to US Q3 growth. US yields currently rise between 3.5 bp  (2-y) and 7 bp (10-y). The German yield curve bear steepens after yesterday’s post-ECB flattening with yields rising between 0.5 bp (2-y) and 6.5 bp (30-y). The reflation trade and additional ECB QE buying continues to support the narrowing of intra-EMU spreads versus Germany. Italy still outperforms (-4 bp for 10-y spread).

The price action on the major FX cross rates was more contained compared to what happened on the interest rate markets. EUR/USD this morning tried to regain the 1.11 barrier, but the gain could not be sustained. The dollar even regained some ground after the retail sales as recent data provide little reason for the Fed to step up its rhetoric on further policy easing. Remarkably, the rise in USD/JPY (currently 108.10 area) stalled despite the risk-on context and higher USD yields. Sterling also remained well bid supported by headlines that UK PM Johnson and EU’s Juncker will meet to discuss Brexit on Monday. EUR/GBP dropped to the 0.8900 area. Cable ‘jumped’ to the 1.2450 area.

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News Headlines

Eurozone wages increased at a 2.7% QoQ pace during the second quarter this year. That’s an acceleration compared to Q1 (2.5%) and the fastest clip since 2009 and underlines the strength of the EMU’s labour market despite a weakening economy. The rise was driven by Germany (3.2%) and Spain (2.8%) while France and Italy (both below 2%) are the bloc’s laggards.

China has expanded its list with US goods that are exempted from new tariffs, the state-run news agency Xinhua reported. It added US soybeans and pork to the list and probably bought 15 cargoes of the beans on Thursday, the US said. The move comes after president Trump postponed a 5% tariff increase due to kick in on October 1st just yesterday.

Czech state attorneys dropped criminal charges against PM Babis, the attorney’s office said today. They started an investigation into Babis’ alleged misuse of European Union subsidies. The case against Babis was the major reason why some political parties refused to govern with Babis’ ANO movement, leaving him to run a minority government with the Social Democrats that relies on the Communist Party to secure a majority.


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