- European equities opened weaker today, copying yesterday’s weakness on Wall Street, but turned positive afterwards in an uneventful trading session. US stock markets gain around 0.3% at the start of dealings.
- US Non-manufacturing ISM rebounded in August to 55.3 from 53.9 in July when the index fell sharply. The outcome was near expectations.
- Bank of Canada raised its official rate for a second meeting in a row to 1% from 0.75%. Consensus was divided over the outcome. As a result in a first reaction the Canadian dollar rose 2 big figures against the US dollar.
- Hungary and Slovakia suffered blows as the EU’s top court dismissed their objections to the EU’s refugee quota plan, paving the way for an intensifying conflict between Brussels and eastern member states who have ruled out complying with the law.
- Germany’s finance minister has called for the ECB to dump its bond buying programme and negative interest rates, saying the eurozone’s recovery was now strong enough to support a return to "normal" monetary policy.
- The Catalan parliament is expected to approve plans for a referendum to break away from Spain, setting it on a collision course with the Spanish government which has vowed to stop it. Lawmakers are set to vote on the law approving an October 1 referendum in the coming hours, and it is likely to be approved as the pro-independence parties have a majority in the regional parliament.
- France plans to pass legislation by the end of 2017 to phase out all oil and gas exploration and production on its mainland and overseas territories by 2040, becoming the first country to do so, according to a draft bill presented on Wednesday.
- Hurricane Irma, one of the most powerful Atlantic storms in a century, churned across northern Caribbean islands with a potentially catastrophic mix of fierce winds, surf and rain, en route to a possible Florida landfall at the weekend.
Rates
Waiting game
Global core bonds lost slightly ground today with Bunds marginally underperforming US Treasuries. Positively oriented stock markets after a weak opening and a surge in oil prices ($53/barrel to $54/barrel) explain the (modest) decline. Rumours about an explosion near North Korea caused a temporary hick-up, but it was rapidly erased. The EMU eco calendar was empty while a smaller than forecast US Trade deficit didn’t bother traders. The upcoming US non-manufacturing ISM and Bank of Canada rate decision remain wildcards, but ahead of tomorrow’s ECB meeting many investors will probably remain sidelined.
At the time of writing, the German yield curve bear flattens with yields up to 1.6 bps (2-yr) higher. US yields shift up to 0.8 bps (10-yr) higher. From a technical point of view, the US 5-yr (1.69%), 10-yr (2.10%) and 30-yr (2.68%) yields fail to regain yesterday’s lost support levels for now. On intra-EMU bond markets, 10-yr yield spreads versus Germany are nearly unchanged with Spain slightly underperforming (+2 bps) ahead of tomorrow’s auction.
The German Finanzagentur tapped the on the run 5-yr Bobl (€3B 0% Oct2022). Total bids amounted to €3.94B, slightly above the €3.7B average at the previous 4 Bobl auctions. This amount of bids remains rather low. The Bundesbank set aside €0.56B for secondary market operations resulting in an official bid cover 1.6. The auction tailed 1 cent.
Currencies
Dollar struggles, but few additional losses
The dollar remains in the defensive across the board as global uncertainty and political noise from Washington deprive the US currency from highly needed interest rate support. That said, for now, the US currency hasn’t broken any technically relevant levels yet. EUR/USD trades in the 1.1935 area. USD/JPY hovers in the high 108 area.
This morning, Asian equities traded mixed to slightly lower, but the losses were limited given the volatility in the US yesterday. The yen held near recent highs against the dollar (108.65/70 area). EUR/USD showed no consistent reaction on recent global uncertainty. The pair was little changed at around 1.1915. Other euro cross rates (EUR/JPY, EUR/GBP, …) felt some stronger headwinds.
In Europe, there was again no dominant theme to guide trading in the major USD or euro cross rates. Several economic and non-economic issues (Korea, US political and budget issues, tomorrow’s ECB decision) swirled and clouded investors’ outlook. There was no clear cross market directional trend. German factory orders were slightly softer than expected, but this wasn’t the market’s focus. The US trade deficit was almost as expected. Global uncertainty caused European markets to open with a slight risk-off bias. Core yields held near the recent lows but didn’t decline any further. The same applies for USD/euro interest rate differentials. Global uncertainty kept the dollar in the defensive against the euro and the yen. USD/JPY hovered in the mid 108 area in early European dealings, but regained a few ticks as equity sentiment improved slightly later in the session. EUR/USD kept a cautious upward bias and settled in the lower half of the 1.19 big figure. The recent top (low of the dollar) remains on the radar.
After the close of this report, the US non-manufacturing ISM will be published. Later this evening, the Fed’s Beige book is scheduled for release. For now, the assessment on the dollar hasn’t changed. The US currency remains in the defensive. Good eco data might help, but the dollar needs renewed interest rate support and an easing in global and domestic (political) uncertainty. On the euro side of the story, the question is whether Draghi can/wants to convince markets that a strong euro will cause a slower path of ECB policy normalisation. This last question should be answered by tomorrow evening.
Sterling technical rebound continues
There was again hardly any economic news from the UK. Over the previous days, no news was good enough news to support a technical sterling rebound and this pattern continued today. EUR/GBP held near the recent lows even as EUR/USD remains well bid. EUR/GBP trades in the 0.9140 area. Sterling also gained a few more ticks against the dollar. Cable trades in the mid 1.30 area. There was again plenty of Brexit noise from politicians on both sides of the English channel. However, it didn’t prevent a further sterling short squeeze.
