Markets:
The reflation trade/rebound took a breather today. That risk rebound was supported by investor hope that an easing in global trade tensions and a Brexit solution could remove some longstanding sources of uncertainty. Yesterday’s developments in the UK parliament at least delayed the ‘removal’ of this roadblock for the EMU and the UK economy. The jury is still out on how & when the Brexit process will continue. The event risk of a disorderly Brexit remains low though. Still, yesterday’s developments in London provided a good reason from some short-term players to take (partial) profit on the reflation trade. There were few eco data in Europe and even less in the US. French business confidence disappointed. We don’t give too much weight to the report (tomorrow’s PMI’s and Friday’s IFO have more market moving potential), but it didn’t help to sustain a further rise in (core) European yields. Finally, US and European earnings weren’t strong enough for major equity indices to take out nearby resistance levels. To conclude, there was no really high profile news today, but secondary events provided a good enough excuse for investors to take a more cautious approach. European and US equities are trading mixed to moderately lower and so do core bond yields. US yields decline 2-3 bps with the front end of the curve outperforming. The German yield curve bull flattens with yields declining between 0.5 bps (2-y) and 5.0 bps (30-y). The decline in core yields this time didn’t help peripheral bonds. 10-y intra-EMU spreads versus Germany widened marginally, with Greece (4 bp) and Italy (3bp) underperforming.
Recent FX trends also came to a standstill or met an, albeit modest, countermove. EUR/USD slipped to the 1.1110 area, but already showed a tentative intraday bottoming at the start of the US trading session. EUR/USD traders are awaiting tomorrow’s EMU PMI’s and the ECB policy meeting/press conference. Today’s price action suggests that investors don’t bet on additional negative/soft news. EUR/USD trades in the 1.1120/25 area, preserving most of recent gains and a constructive technical set-up. Interestingly, USD/JPY (108.55 area) and AUD/USD (0.6850 area), notable pointers of global risk sentiment, were sold in Asia this morning, but already found a bottom during the European morning session. Yesterday’s Brexit votes blocked the sterling rally of the previous days. The risk of a disorderly Brexit still looks more or less excluded, but markets are pondering the consequences of a scenario of new elections after parliament rejected PM’s Brexit timetable. Still, the sterling correction remains very modest with EUR/GBP trading near 0.8635 and cable hovering in the upper half of the 1.28 big figure. UK PM Johnson and opposition leader Corbyn somewhat surprisingly met to discuss a new timetable. The meeting didn’t yield any concrete result. Sterling regained a few ticks.
News Headlines:
One of the two Czech central bankers who voted in favour of a rate hike in September may change his mind in the upcoming meeting and vote for rate stability. Vice governor Mora said arguments for a hike have weakened as Germany, the biggest buyer of Czech exports, showed further signs of slowing down. Also, risks for inflation to break above the 3% tolerance level has declined, Mora added. Inflation in September amounted to 2.7% y/y.
The Bank of Japan is said to considerer lowering its price and growth forecasts in its October meeting which could pave the way for further monetary easing. BoJ president Kuroda hinted at doing so last month, citing “overall increasing risks”. However, some policy makers believe the ammunition should be saved for worse economic conditions as concerns for a global deterioration eased somewhat recently.
