Markets
Friday’s trading session developed in a very orderly fashion until the end of US dealings. Risk aversion was all of a sudden name of the game after China cancelled a planned visit to farms in the US heartland. The trip was promoted as a sign of goodwill. US equities sold off with main indices losing 0.5% to 0.8%. US Treasuries caught a last minute safe haven bid. The US yield curve bull flattened with yields down 5.4 bps (2-yr) to 6.7 bps (30-yr). Several Fed governors shared their views after last week’s policy meeting. Most of their views were known. We retain that Dallas Fed Kaplan is the one governor who penciled in another rate cut in 2020, rather than in 2019. He added though to be open minded. The German yield curve flattened with daily changes ranging between +0.4 bps (2-yr) and -2.2 bps (30-yr). The EMU eco/event calendar was empty. 10-yr yield spread changes vs Germany were small with Italy (+5 bps) underperforming. The dollar slightly had the upper hand over the euro with EUR/USD dropping from 1.1041 to 1.1017. All price action occurred within well-known boundaries. EUR/GBP spent most of the day in the lower half of the 0.88 big figure. There’s no tangible progress in Brexit talks. We think that quite some good news is already discounted in sterling at current levels.
Most Asian stock markets cede ground this morning with China underperforming (-1.5%) even as the Chinese Ministry of Commerce labelled last week’s trade talks in Washington as “constructive”. Oil prices trade near $65/barrel as geopolitical tensions in the region are highlighted by hawkish comments from Iran FM Zarif. Core bonds trade with a minor upward bias. Today’s eco calendar contains EMU September PMI data. Consensus expects a stabilization for both the manufacturing (47.3 from 47) and services (53.3 from 53.5) gauges. Such outcomes would further stem huge recession bets made in August and would, together with conclusions drawn after the ECB meeting, strengthen the floor below European yields. It would especially be the case if we were to receive some better news from Germany. The German 10-yr yield from a technical point of view sits in a range, broadly between -0.73% and -0.41%. Decent EMU eco data could force a fresh test of EUR/USD resistance around 1.1071 (incoming downward trend line) and 1.1112. Speeches by central bank governors are a wildcard for trading. Dutch central bank governor Knot will probably repeat his strong opposition against the ECB’s latest easing package and highlight the divide within the central bank. That could underpin EU yields and the euro as well. The Kingdom of Belgium taps three OLO’s today (OLO 77 1% Sep2026, OLO 87 0.9% Jun2029 and OLO 76 1.9% Jun2038) for a combined €2.3-2.8bn. Raising the maximum amount would mean that the debt agency would have completed its stated €28bn OLO funding need.
News Headlines
The NY Fed announced on Friday that it will conduct a series of overnight and term repurchase agreement (repo) operations to help maintain the federal funds rate within the target range. The Open Market Trading Desk will offer three 14-day term repo operations for an aggregate amount of at least $30 bn each. The Desk also will offer daily overnight repo operations for an aggregate amount of at least $75 bn each, until Thursday, October 10, 2019.
Tensions in the Middle East are rising after the US put additional sanctions on the Iranian Central Bank and on the country’s sovereign national wealth fund. The move tries to further limit any remaining financial activity the country still conducts with Europe and Asia. At the same time, press reports suggest that it will take longer for Saudi Arabia to fully restore its oil production facilities.
UK PM Johnson meets with US President Trump tomorrow. The Sun reports that both might publicly commit to agree a UK-US trade deal by July 2020. The two leaders are supposedly aiming for the biggest free trade agreement that the US has ever done with another country.
