Markets
After German Bunds on Monday, it yesterday was US Treasuries’ turn to leapfrog higher. A batch of dismal eco data again initiated the move. Horrible EMU PMI’s were followed by a weak Richmond Fed Manufacturing Survey, but especially consumer confidence. The latter is, together with the labour market, one of the key gauges for investors to watch. Will weakness in the manufacturing survey contaminate the US domestic economy? Details of the Conference Board’s indicator highlighted that consumers’ assessment of both current situation and the future deteriorated. EUR/USD returned north of 1.10 after the data. US yields dropped by 5.6 bps (2-yr) to 8.1 bps (10-yr) on a daily basis. The German yield curve flattened with changes varying between +0.6 bps (2-yr) and -3.2 bps (30-yr). 10-yr yield spread changes vs Germany ended close to unchanged.
The outperformance of US Treasuries continued after US Democratic House Speaker Pelosi announced an impeachment inquiry against US President Trump. US stock markets lost 0.5% (Dow Jones) to 1.5% (Nasdaq). EUR/USD rose to a 1.1020 close. US President Trump is being accused of betraying his oath of office and US national security. More specifically, he would have tried to blackmail Ukrainian president Zelensky into starting an investigation against local business activities of the son of leading Democratic presidential contender Biden by holding back nearly $400mn of military aid. Six US House committees will now begin a formal impeachment inquiry. If a simple majority of the Democratic-controlled House of Representatives approves the resolution, than US President Trump is officially impeached with a trial in US Senate being the next phase. In order to be convicted however, a 2/3rd majority in the Republican-led US Senate is needed. That would require at least 20 Republican Senators to vote against Trump. The way the cards are dealt right now, it seems that the impeachment procedure is some kind of desperate Democratic attempt to derail 2020 elections. There’s insufficient evidence to convince Republican(s) (voters) to hang the US President. The conviction of the story of the, currently still unknown, whistle-blower is probably the one thing that can still change fortunes. If not, US President Trump will probably come out on top heading into next year’s elections.
Today’s eco calendar is uninspiring. Asian stock markets lose up to 1%. Speeches by central bankers are wildcards. This week’s EMU & US eco data halted the correction higher in core bond yields and started a new turnaround. We think the overall market environment will remain bond friendly without fresh input. Headlines on Trump’s impeachment procedure could also further dampen the overall risk mood. EUR/USD remains within the 1.0926-1.1112 September trading range. Risk aversion slightly benefits the dollar. UK investors will be watching the return of UK Parliament after the UK Supreme Court yesterday judged UK PM’s Johnson’s prorogation unlawful. Unfortunately for sterling investors, the roadmap to the October 31 brexit deadline remains covered in fog. The most likely scenario remains for PM Johnson to try to broker a new deal by October 19. If not, he’ll be legally obliged to ask the EU for a delay. That is of course if he doesn’t sidestep law. Anyway, we hold our view that sufficient positive news is discounted at current sterling levels.
News Headlines
New Zealand’s central bank (RBNZ) kept its policy rate unchanged at 1%. The statement suggested that “there remains scope for more fiscal and monetary stimulus”. Sluggish consumer/business confidence and subdued inflation expectations could trigger action at the November 13 meeting, when the RBNZ has fresh growth and inflation forecasts. NZD/USD trades near opening levels around 0.6325.
Bloomberg reports that Chinese companies are preparing to purchase more US pork in a sign of goodwill ahead of early October high-level trade talks in Washington.
