Markets
Mounted trade optimism continued to lift spirits today. The lack of data or other relevant news provided markets no real choice but to continue on the same path going into the publication of the non-manufacturing ISM. Momentum did fade somewhat compared to the previous days though as markets have absorbed quite some positive news already. China doubling down on the US to roll back import tariffs as part of a partial trade deal also lingers in the minds of investors. The non-manufacturing ISM eventually added to recent optimism, beating consensus (54.7 vs. 53.5 expected) on stronger employment and new orders. European stocks edge higher with gains up to 0.25%. Core bonds lose further ground. Fed’s non-voting governor Barkin said the three rate cuts reflect uncertainty over the economic outlook but doesn’t see a recession as imminent. US yields rise 6 bps (2-yr) to 9 bps (30-yr). The German yield curve bear steepens with yield changes varying from 1 bps (2-yr) to 5 bps (10-yr). France’s 10y yield is close at leaving the negative territory behind. Spreads vs. Germany narrow up to 3 bps (Spain). EUR/USD simply continued yesterday’s downtrend as widening US/German interest rate differentials further supported the dollar. The couple is currently testing the 1.107 intermediate support. USD/JPY surpasses 109.
The UK services PMI rose marginally more than expected and ended up right at the neutral level of 50 which represents no economic growth nor contraction in the sector. The economy wide indicator equally managed to settle at 50 while markets were anticipating a minor rise to 49.5. These numbers come after the manufacturing PMI also surprised on the upside last Friday and triggered a modest downleg in EUR/GBP (sterling strengthened). The currency pair declined from the topside of the sideways trend channel at 0.864/5 to 0.862 at the time of writing. Cable cautiously settles above 1.29. While the election campaign has yet to erupt, the first veto’s have already been put forward. Leader of the Liberal Democrats Swinson said her party will not help Corbyn’s Labour to take power. One could consider an alliance between the Libdems and Labour a real threat to Johnson’s Conservative Party bid of securing a parliamentary majority. Having this option removed from the table might explain today’s sterling strength.
News Headlines
UK economic activity got off to a weak start to the final quarter of 2019 as private sector activity stagnated. The composite PMI came in at a poor 50.0 in October (vs. 49.3 in September). The slight improvement was in part driven by a small uptick in the services PMI. The services PMI also posted a reading of 50, up from 49.5 in September, indicating a standstill in October. Although this represents a slight improvement on September’s contraction, new business and international demand remain subdued due to the prolonged uncertainty surrounding Brexit.
China is pushing the US to roll back additional tariffs imposed in September as part of a phase one trade deal, people familiar said. A source said that Chinese negotiators want Washington to also remove existing tariffs of 25% on about $250bln of imports, on top of the 15% tariff relief on $125bln worth of Chinese goods that was announced this morning. In return, Beijing may remove levies on US goods.
ECB policymaker Pablo Hernandez de Cos called today for the euro zone to roll out a common fiscal stabilization mechanism to address a slowing economy in the bloc rather than asking certain cash-rich countries to increase public spending. De Cos also urged politicians to undertake steps towards a capital markets union.
