Markets:

There was no high profile new topic to guide global market trading today. Investors still pondered the political and economic consequences of this weekend’s attack on Saudi oil installations and the subsequent jump in the oil price. Investors kept a cautious risk-off attitude. Other themes (US-Japan trade deal, US China negotiations,..) didn’t yield enough specific material to counterbalance investor uncertainty on the Iran/Saudi Arabia tensions. Tomorrow’s Fed policy decision also reinforced some kind of wait-and-see attitude. Economic data were unable to inspire any intraday trend move. German ZEW expectations improved more than expected to -22.5 from -44.1, but the current conditions sub-index deteriorated further. US August production printed strong at 0.6% M/M in August, but as usual left few traces on markets. US yields declined slightly with a tentative bull steeping: -1.5bps (2y) to -2.5 bps (10y/30y). Moves at the very short end of the curve indicated ongoing tensions in the US market markets. The NY Fed will conduct an overnight repo operation today. German bonds show no clear trend with yield changes less than 1 bp compared to yesterday’s close. 10-y intra-EMU spreads with Germany widened marginally with Greece outperforming (-4 bps) and Italy underperforming. Former PM Renzi leaving the Democratic party and forming a new political group is seen as threatening the fragile political equilibrium in the country.

The dollar retains the benefit of the doubt on the FX market. EUR/USD retested the 1.10 this morning but regained a few ticks later. However, the overall picture still points to underlying USD strength and tentative euro weakness. Investors apparently fear the Fed not being as soft as what is discounted in markets. Tight USD liquidity might be (slightly) USD supportive. In this respect, the dollar (temporary?) lost marginally as the Fed announced its repo operation for later today. Even so, at around 1.1030 the picture of EUR/USD remains unconvincing. USD/JPY is holding a tight range in the lower 108 area. Sterling lost some momentum after a strong run at the end of last week and yesterday. EUR/GBP regained a few ticks (EUR/GBP 0.8880 area). Making progress in the EU-UK Brexit negotiations, if any, develops at a snails pace. The UK Supreme Court investigates Boris Johnson’s decision to suspend Parliament.

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News Headlines:

German ZEW investor sentiment declined more than forecast in September, from -13.5 to -19.9. The ZEW print was the softest since May 2010. It came with a silver lining though as the forward looking expectations component rebounded from an 8-yr lower of -44.1 to -22.5 (vs -38 expected). ZEW President Wambach said that the improvement is by no means an all-clear concerning the development of the German economy, but rather strong fears (in August) regarding a further intensification of the US-Sino trade conflict didn’t occur. The ECB’s stimulus also eased some investor concerns.

The Swedish unemployment rate (SA) unexpectedly increased from 7.2% to 7.4% in Augustus, while consensus expected a decline to 6.8%. The data were published together with Minutes from the previous Riksbank meeting. While these confirmed that all members still back a policy rate hike later this year, investors focused on another part with weak labour data in mind. Board members stressed that sentiment has worsened and that the risk of a faster slowdown has increased. EUR/SEK rose from 10.62 to 10.70.

US industrial production data printed strong in August. They showed a 0.6% M/M increase (vs 0.2% M/M expected) with the key manufacturing sector posting a 0.5% M/M gain. An early sign that the export-oriented sector is stabilizing? Utility output, mining production and output of consumer goods increased as well. Total capacity utilization, measuring the amount of a plant that is in use, rose to 77.9% from 77.5%.

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