- European equities showed a mixed picture, but losses/gains remain small with Spain underperforming ahead of the Catalan referendum.
- The German right-wing nationalist Alternative for Germany suffered its first split after its stunning success in elections, as leader Petry said she would not sit with the party in the Bundestag. Horst Seehofer, the CSU leader has thrown the party’s alliance with Merkel’s CDU into doubt, questioning the formation of a joint parliamentary group.
- German FDP frontman Lindner showed his hawkish feathers regarding E(M)U. The FDP doesn’t accept automatic transfers in the EMU. He asks for insolvency rules to strengthen liability of private investors and says a change of direction is needed on Greek policy.
- ECB Mersch didn’t unveil any secrets by saying that the ECB will "prudently" adjust its tool box when warranted. Lithuanian ECB member Vasiliauskas was more outspoken when he said that he prefers to have a concrete date or complete term as to how long the central bank can be buying bonds.
- Speaking at a press conference in his official residence, Japanese PM Abe said he would dissolve parliament on September 28th and go to the public (snap elections). He said the security threat from North Korea could not be allowed to prevent a democratic election. He promised to raise the consumption tax from 8 to 10% in 2019.
- Brent crude oil jumped towards $58 a barrel on Monday – its highest level since January – and was on course to close at the highest level since 2015. Oil has been boosted by signs that the massive crude glut built-up since mid-2014 is slowly being drawn down, as producers cut supplies and robust demand eats into the surplus.
- Greece has taken another step towards ending nearly a decade of bailouts and outside economic surveillance, after the EU confirmed that Athens was no longer in breach of euro area budget rules.
- Sentiment among German business executives dipped in September for the second month in a row, nudging mildly further away from the record logged this summer, a closely-watched IFO survey showed.
Rates
Bonds little affected by German election surprises
The German election surprise didn’t trigger safe haven flows on core bond markets and peripheral spreads barely widened. European equities traded stable while the decline of EUR/USD was technically irrelevant. ECB and Fed talk also failed to give distinct direction. At the time of writing, US yields are to 1 bp higher, while German yields drop between 0.7 bps (30-yr) and 2.5 bps (5-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany widen 2 bps (Spain/Italy) to 3/5 bps (Portugal/Greece).
German Bunds and (US Treasuries) opened little changed after the German election outcome which inject some uncertainty about the government formation and about the country’s future policy versus E(M)U. Peripheral yield spreads, vulnerable for EMU negative news, hardly widened. The Bund rallied on a slightly weaker-than-expected German IFO business confidence, but peripheral spreads remained little changed. The CSU chairman questioned the formation of a joint parliamentary group with the CDU sister party. The FDP leader, a potential coalition party leader, was very critical towards the E(M)U and a front woman of the AfD refused to take her seat (see headlines). These comments show that Germany may become less politically stable and less willing to help EMU, even as these comments shall not represent future policy guidelines. However, interestingly, these comments again didn’t impact core bonds or peripheral bonds. The Bund rally ran out of steam and turned south when US traders joined the fray. Gains largely evaporated. US Treasuries showed a similar, but less outspoken price profile. NY Fed Dudley, a dove, is firmly in the majority group inside the FOMC. He more or less repeated Yellen’s reasoning why rates will continue to be gradually raised.
Currencies
EUR/USD declines modestly after German election
Last week, the dollar remained in the defensive even as the Fed reiterated its commitment to normalize policy. Today, the focus turned to the euro. The German election outcome might have some negative consequences for intra-EMU cooperation. EUR/USD was captured in a gradual intraday downtrend. EUR/USD dropped below 1.19. However, the first support at 1.1823 still stays out of reach. USD/JPY hovered in a tight range mostly slightly north of 112.
There were several stories to guide trading at the start of the new week in Asia. Japanese equities outperformed as markets look out for new pro-growth measures as PM Abe considered (later confirmed) snap elections for next month. USD/JPY returned well north of 112, but the rally was hampered as global sentiment turned cautiously risk-off. EUR/USD dropped temporary to the 1.19 area on the outcome of the German election at the start of trading, but Asian investors were looking for more guidance from Europe.
The reaction in Europe to the German election was modest and a bit diffuse across markets. European equities soon reversed initial losses. German government yields declined slightly and peripheral spreads widened a few basis points. EUR/USD started a gradual intraday downtrend. The German IFO business sentiment was weaker than expected. There was no immediate market reaction, but the euro slide continued. The decline accelerated as the pair dropped below the Asian lows in the 1.19 area. German FDP leader advocated more financial orthodoxy on intra-EMU transfers and regarding Greece (see headlines). Once again, there was no one-to-one link between comments and the intraday decline of the euro. However, the headlines suggest that the debate on the financing of Europe might become difficult. EUR/USD traded in the 1.1875 area at the start of the US trading session. Even so, the 1.1823 support again wasn’t reached.
There were few eco data in the US. The impact of German elections on US markets was negligible. US markets in the first place focus whether the government can make progress on key policy issues including tax reduction. EUR/USD trades in the 1.0880 area. USD/JPY has returned to the 112.20 area. To conclude: euro softness and maybe a pinch of dollar strength.
EUR/GBP nears recent lows
Sterling trading was mostly driven by global markets reaction to the German election results. The euro opened substantially lower compared to Friday’s close and remained under pressure in early European dealings. EUR/GBP declined to the 0.8785 area. The rise of sterling temporary also propelled cable. However, finally the dollar outperformed the euro and sterling. The German election outcome at some point might also complicate the Brexit negotiations as it hasn’t become easier for Merkel to make concessions. EUR/GBP still trades near the intraday lows in the 0.8785 area. Cable trades off the intraday top in the 1.3510 area. The formal negotiations between the UK and the EU restart later today.
