Markets were focused on the (re)start) of high-level US-China trade talks planned today and tomorrow in Washington. Conflicting headlines/rumours overnight only illustrated the highly binary nature of the event. Equity futures showed wild swings on subsequent contradictory press reports. At the start of the European session, the storm calmed down and markets embraced the working hypotheses that both parties might see political value in a limited deal, including some kind of trade truce. Press headlines suggested that the a currency pact that was agreed upon before talks collapsed earlier this year, might be part of a partial agreement. Swings in bond and FX markets were more modest than in equities/equity futures. Even so, the guarded but constructive investor attitude on the trade talks weighed on core bonds. EMU eco data (French and Italian production) were unconvincing but largely ignored. The minutes of the September ECB meeting as expected, confirmed that MPC members were highly divided on the composition of the new stimulus package and even on the need for further stimulus as such. Even the formulation of the forward guidance was a subject of discord. The market reaction to minutes was limited. The Bund contract reached an interim low before the release, but followed a broader downtrend as the US trading session continued. The German yields rise between 6 bps (10-y) and 3.5 bps (2-y). 10-y intra-EMU spreads vs Germany changed less than 2 bps. Greece outperforms (-4 bps). US Treasuries outperform German bunds. US September inflation (1.7% Y/Y headline, 2.4% Y/Y core) was close to expectations. The US yield curve bear steepens with yields rising between 1.8 bp (2-y) and 4 bp (30-y).

The impact of the trade turbulence on FX in general and on EUR/USD in particular often wasn’t that clear lately. Should a truce in the trade war be considered supportive for the (high-yielding) USD or for Europe and the euro? At least today, hopeq on a trade agreement triggered a (modest) risk-on repositioning with EUR/USD, USD/JPY and EUR/JPY trading with an (albeit guarded) upward bias. EUR/USD regained the 1.10 handle and currently tries hold above the top of MT term downtrend channel. EUR/USD is trading in the 1.1020 area. USD/JPY is changing hands near 107.80.

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Concerning sterling trading, there was little concrete news from the Brexit scene as markets await news from a key meeting between UK PM Boris Johnson and his Irish counterpart Varadkar. August UK production data suggest a sluggish UK economic performance, in particular in the manufacturing sector. However, the UK will likely avoid a second consecutive quarter of negative growth in Q3. The report didn’t help sterling. EUR/GBP is drifting slowly further north of 0.90.    

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Swedish inflation accelerated more than forecast in September (0.5% M/M & 1.5% Y/Y). The Riksbank’s preferred gauge (CPIF; taking into account a constant interest rate) printed above forecasts as well (0.5% M/M & 1.3% Y/Y), keeping the slim probability of a rate hike before the end of the year alive. EUR/SEK fell from a multi-year high (10.94) to 10.84. September Norwegian inflation number printed at consensus (0.5% M/M & 1.5% Y/Y). EUR/NOK still changes hands above 10, which is historically weak for the Norwegian krone.

Turkish President Erdogan threatened to “open the doors” for 3.6mn Syrian refugees to seek shelter in Europe. The threat came one day after the Turkish invasion in Syria which ran into heavy criticism from many EU states. The Turkish lira is under pressure since Erdogan’s military intervention. EUR/TRY rises past 6.50.


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