The start of this week’s trading session marked a stark contrast with last week’s truce. Positive Asian risk sentiment – thank you November PMI’s – and, especially, the outcome of this weekend’s German SPD leadership contest started an intensive selling spree on core bond markets. German Bunds underperformed US Treasuries. The party’s leftwing contestants (Walter-Borjans & Esken) beat the centrist team of finance minister Scholz and Geywitz. They campaigned on a platform of breaking with the CDU and trying to rebuild in opposition, a sharp rise in spending on infrastructure, tougher climate change laws and a big stimulus package to help the German economy through its current weak patch. The SPD gathers this week in Berlin to contemplate whether or not to remain within the ruling coalition. A decision to leave would most likely result in a temporary minority CDU/CSU government with main legislation passed through Parliament and fresh elections scheduled in 2021. Longer term, the SPD shift implies a higher likelihood of German fiscal spending, explaining this morning’s reflationary reaction on bond markets. The German yield curve bear steepens with yields adding 1.5 bps (2-yr) to 8.7 bps (30-yr). 10-yr yield spread changes vs Germany are close to unchanged with Italy (+3 bps) underperforming and Ireland (-4 bps) outperforming. The US yield curve bear steepens as well with yields rising by 2 bps (5-yr) to 6.4 bps (30-yr) despite an unexpectedly declining manufacturing ISM (48.1 vs. 49.2 expected, from 48.3) with key subseries such as employment and new (export) orders (deeper) in contraction territory.

Risk sentiment made a U-turn for the worse around European noon after US President Trump tweeted that, effective immediately, the US will restore the tariffs on all steel and aluminum that is shipped in the US from those countries. He blames them for presiding over a massive devaluation of their currencies. The tough trade talk came on the back of news from Chinese media this morning suggesting that the government wants a high price for a phase one trade deal. Trump’s tweet was accompanied by another shout-out to the Fed to lower rates and loosen monetary policy. The greenback initially held relatively stable, but started drifting south once US traders entered dealings. EUR/USD moved from the low 1.10 to the 1.1040 area before extending gains towards 1.106 after a weaker than expected US manufacturing ISM. European stock markets lose around 0.5% while the upleg in core bond yields grinded to an intraday halt. There’s no return action yet though. Trading in EUR/GBP was choppy around 0.8530.

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News Headlines

President Trump ruled to reinforce tariffs on steel and aluminum from Argentina and Brazil. According to Trump, Argentina and Brazil “have been presiding over a massive devaluation of their currencies”. Both countries have seen their currencies tumble in the wake of rising political tensions, a series of rate cuts and wider emerging market fragility. The US president also prompted the Fed to act accordingly and slash interest rates.

Hong Kong’s economy continues to suffer from massive protests. October’s retail sales plunged by 26.2% (Y/Y), worse than the expected 22.6% drop. The tumble represents the fourth month of double-digit declines. Looking at the details, tourist-related sales, the main drag, plummeted by 42.9% and Hong Kong’s unemployment rate edged up to 3.1% from 2.9% in September. The ongoing political turmoil is increasingly crippling through Hong Kong’s economy and is damaging the government’s fiscal position too.

European PMIs printed better than expected, indicating the worse may be over. The aggregate euro zone manufacturing PMI came in at 46.9 in October beating the 46.6 consensus. Increased new orders and an uptick in business sentiment may signal – despite still being in contractionary territory – the bloc’s manufacturing slump may be bottoming out.


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