• US stocks opened lower after President Trump injected fresh uncertainty into markets by threatening to shut down the government if Congress did not pay for his proposed border and to pull out of the North American Free Trade Agreement.
  • Economic activity in the eurozone has picked up in August after a disappointing July, with a strong performance in the manufacturing sector (57.4 from 56.6 vs 55.4 expected) offsetting a slight decline in the services industry (54.9 from 55.4 vs 55.4 expected), according to August PMI’s.
  • US PMI’s printed in the opposite direction of EMU ones. The manufacturing gauge unexpectedly declined from 53.3 to 52.5 (vs 53.5 expected) while the services PMI rose from 54.7 to 56.9 (vs 55.0 forecast).
  • Mario Draghi didn’t give any specific clues on the future of the ECB’s asset-purchase program in his speech to Nobel laureates and young economists, saying instead that central banks need to be open-minded when preparing for new challenges. Focus turns to his Jackson Hole address on Friday.
  • US oil inventories fell 3.6 million barrels last week, according to API data. EIA figures today are expected to confirm a similar drop. However, increasing gasoline and diesel supplies offset the withdrawal, balancing the effect on prices.

Rates

Core bonds go higher on Trump inspired risk-off

Core bonds move modestly higher despite strong EMU business confidence, as comments of president Trump on NAFTA and on a possible government shutdown spook markets. Riskier assets like equities, peripheral bonds and even the dollar lose ground. Core bonds, gold and the yen benefit. Trump comments caused some risk-off jitters during the Asian overnight session, slumbered during the European morning session, but re-appeared with a vengeance as the US session gets going.

President Trump threatened to end the NAFTA deal and would eventually prefer to close the government in case Congress doesn’t foresee money for his pet project (" the Wall"). Trump often threatens in negotiations and all his comments shouldn’t be taken for granted, but this time they send some shivers through the markets. Intrinsically, one would expect that US Treasuries be hit most, but investors consider them as a safe haven refuge. T-bills on the contrary reflect the fear for a failure to raise the debt ceiling on time. The spread between the 28 sept/T-bill and the Oct 5 T-bill rose today to 17 bps. End September, the ceiling should be reached.

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The Bund opened a tad lower, but immediately gained some ground. However, stronger than expected EMU PMI business confidence pushed the Bund slightly lower again. European equities opened somewhat higher catching up with US equities which finished strongly yesterday. However, equity opening gains vanished soon and sideways trading kicked in. Similarly the Bund went nowhere till noon. The German Bund auction was only just covered, but didn’t impact dealings. When US traders entered the fray, Trump’s comments were prominently discussed. The US Treasuries went up in a move duplicated by German Bunds. The Bund future currently tests the August high at 164.64, which if broken opens the path to the June and April highs at 165.55/93.

At the time of writing, German yields drop 1.4 (2-yr) to 2 (10-yr) bps, while US Treasury yields decline between 1.2 (2-yr) and 3.1 (10-yr) bps. Peripheral spread widening continued today with the 10-yr yield spread up by 3 (Spain) to 5 bps (Italy/Portugal).

Currencies

Trump comments weigh on US dollar

A new wave of unconventional comments of US president Trump on NAFTA and on a government shutdown aborted yesterday’s USD rebound. At the same time, the euro was supported by very strong EMU PMI’s. EUR/USD returned to the 1.18 area. USD/JPY is drifting back to the 109 barrier.

Overnight, Asian equities opened strong after the WS rally. USD/JPY filled offers in the 109.83 area, but risk sentiment deteriorated after Donald Trump said he may end NAFTA at some point. He also threatened to shut down the US government if he wouldn’t get the funding to build a wall along the Mexican border. Equities ceded part of the early gains. USD/JPY returned to the mid 109 area. EUR/USD was little affected by Trump’s comments.

They nevertheless prevented European equities to profit from the late session WS up-leg. However, there was initially little additional negative impact on the dollar. The focus for (currency) trading turned to the EMU data. EMU PMI’s (especially the German manufacturing PMI) were very strong. EUR/USD jumped to high 1.17 area and found a short-term equilibrium in the 1.1780 area. LT interest rate differentials narrowed marginally in favour of the euro. Risk sentiment remained fragile, preventing USD/JPY to profit from the slight post-PMI rise in core yields. EUR/JPY mirrored the EUR/USD uptick.

US equity futures continued to trade with a negative bias at the start in the US as the overnight Trump headlines returned to the forefront. The dollar continued to fight an uphill battle. EUR/USD (temporary?) regained the 1.18 barrier. USD/JPY dropped to the low 109 area. Yesterday’s USD rebound obviously wasn’t anything more than a technical move. Dollar sentiment remains fragile. The focus stays on the CB Jackson Hole speeches. However, we wouldn’t be surprised if Draghi and Yellen stay muted on any changes in their respective policy approach.

EUR/GBP jumps north of 0.92 barrier

There were plenty of press articles on the role of the ECJ and on how the UK and the EMU will handle juridical disputes in the post-Brexit era. Some comments considered the British language that it will accept no ‘DIRECT’ jurisdiction of the court as a potential opening/moving back on earlier tough separation rhetoric. At least for now, this potential softer approach didn’t help sterling much. EUR/GBP even jumped north of 0,92, admittedly in the first place due to the strong EMU PMI’s. However, cable also dropped temporary below 1.28. Sterling clearly needs concrete signs of progress in the run-up to the next round of formal talks that will take place next week. Cable trades near 1.28. EUR/GBP has settled in the 0.9215 area.

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