There were few economic data in Europe and the US today. European and US equities indices show modest gains. Investors probably felt some comfort from India’s government announcing tax cuts. The move can be seen as a first important example of fiscal stimulus joining the efforts of global central banks to support ailing growth. Two dissenters at Wednesday’s FOMC rate decision (Bullard and Rosengren) published a statement to explain the reasons for their vote. Fed’s Bullard explained its call for 50 bp cut as an act of ‘prudent risk management’ as it would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks. On other side of the Fed-spectrum, Fed’s Rosengren, who opposed a rate cut on Wednesday, said that lowering rates to address uncertainty is not costless. It risks further inflating prices of risky assets and encourages households and firms to take on too much leverage. The impact of both statements on markets was limited but illustrated the divide within the Fed. As announced, the NY Fed today again provided $75 bln of liquidity in a repo operation to ease tensions on the money markets. As was the case yesterday, daily changes in US and German bond markets are limited. US yields decline between 0.3 and 2.0 bp, with LT bonds outperforming. Yields on German bonds also moved about 1 bp, with the 2-y (+0.7 bp) underperforming. Intra-EMU 10-y spreads versus Germany also show limited moves with Italy slightly underperforming (+1bp) and Greece and Portugal slightly outperforming.

In the FX market, the dollar gained modest ground after a loss of momentum yesterday. However, in a broader perspective, trading in the major dollar cross rates is confined to very tight ranges. EUR/USD reversed yesterday’s gain is trading in the 1.1020 area. USD/JPY is holding close to, slightly below the 108 big figure.

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Headlines from the EU-UK Brexit talks continue to set the tone for sterling trading. Yesterday and this morning, sterling rallied after EU Commission president Juncker in an interview indicated that a Brexit deal is still possible. EUR/GBP dropped temporary below the 0.88 barrier. However, enthusiasm already eased at the start of the European trading session as Ireland foreign Minister Coveney indicated that the UK approach posed serious problems and that there is still a wide gap between both sides. Later in the session, the EU said EU’s Barnier and UK’s Barclay agreed technical talks to continue. Sterling currently trades off the rebound top against the euro and the dollar set this morning. However, in a broader perspective, the UK currency quite easily retains the gains recorded this week and earlier this month. EUR/USD is changing hands around 0.8825. Cable hovers in the 1.25 area.

News Headlines

India’s government today announced an estimated $20.5 bln reduction in corporate taxes by reducing the corporate tax rate from 30% to about 25%. The fiscal stimulus intends to stimulate investment and revive economic activity as growth slowed to a six year low. Indian equities rallied more than 5%. The rupee strengthened and yields on government bonds rose as markets expect higher government borrowing.

Belgium’s consumer confidence dropped further in September from -9 to -11, the lowest level since October 2016. Belgian consumers become more concerned about the risk of unemployment (18 vs 13). The outlook index on the economic situation (-22 from -20) and households’ expectations about their personal finances (-4 from -2) also declined.


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