The Asian selling wave slowly dwindled this morning even though markets had enough (geo)political and trade risks to ponder. Turkey on the verge of waging a Syrian war may cause wider instability in the Middle East. US President Trump refuses to cooperate in the impeachment probe and trade war tensions have escalated significantly over the last few days. Regarding the latter, markets clung on to one ray of hope. China signaled it is still open to a partial trade deal if the US takes the tariff increases which are set to kick in later this month and in December off the table. China offered to buy more agricultural products in return. It does not give in on major sticking points however and the US has repeatedly said that it only wants the full package rather than a limited trade agreement. Nevertheless, it’s enough for a broad based gain in European and US equity markets (0.7-1.2%). The US yield curve bear steepens with rates unchanged at the short end while adding 2-3 bps in longer tenors. The German curve also bear steepens, adding 1 bp (2-yr) to 2.5 bps (10-yr). German yields found additional support from ECB’s de Guindos. The central bank’s vice-president ruled out a “policy U-turn” under next president Lagarde but raised the bar for further interest rate cuts, saying they would require a “good, in-depth discussion in the Governing Council”. Peripheral spreads narrow with Greece (-5 bps) outperforming peers. Greece is the next to join the club of negative-yielding debt issuers having sold 3-month T-bills at -0.02%. On FX markets, EUR/USD profits only slightly from today’s risk-on. The couple edged higher towards the high 1.09 area but again falls short of (a real test near) 1.10. USD/JPY rebounded back above the 107 level (107.34 at the time of writing). Fed’s Powell is scheduled for a speech a bit later today but we doubt whether he has anything new to add after yesterday’s message.

Today’s story for the pound sterling concentrates around no more than two Brexit related headlines. The first one to pop on the screen came from the Times. The EU was ready to make a “major concession” to thrash out a Brexit deal, the newspaper reported, by making it able for Northern Ireland to leave the current backstop agreement after some years. The EU has always rejected such a time limit in the past … and continues to do so today.  EU officials denied that the European Union is preparing any concessions shortly after the Times’ report got public. Both headlines triggered a knee-jerk reaction with sterling undoing the initial EUR/GBP downleg in a matter of minutes. The spike aside, the couple held an upward trajectory today, gradually nearing the 0.90 handle. Cable is virtually trading unchanged vs. yesterday, filling bids in the 1.22 area.

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News Headlines

China is still open to agreeing a partial deal with the US as long as no more tariffs are imposed by Washington, Bloomberg reported, citing a Chinese official. In return, Beijing is offering to increase annual purchases of US agricultural products. Negotiators heading for talks aren’t optimistic about securing a broad agreement.

Euro zone officials are urging Germany and the Netherlands to use their fiscal space to invest more and boost economic growth in their own economies and throughout the euro area amid deteriorating macroeconomic conditions, echoing a call from the ECB last week.


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