- European equities eke out small gains today (+0.2%) as the trading week slowly takes off. The Spanish IBEX 35 underperforms (-0.60%) as the standoff between Spain and Catalunya enters a crucial phase. US stock markets opened with gains of around 0.25%.
- The US empire manufacturing matched the highest level since 2009, unexpectedly rising from 24.4 to 30.2 in October (vs 20.4 expected).
- Italian President Mattarella may dissolve parliament the last days of the year, Corriere della Sera reports, without citing anyone. An electoral campaign may follow for 60 days, with election possibly falling on March 4 as one of the options being considered.
- The Spanish government has given Catalan leaders until Thursday to back away from claiming independence or face the possibility of direct rule from Madrid. Catalan president Puigdemont refused this morning to clarify whether he declared Catalonia independent from Spain last week. Mr Puigdemont instead called for dialogue.
- UK MP May travels to Brussels today for talks over dinner with EC Juncker after deadlock in Brexit appeared to dash her hopes a summit this week could launch negotiations on future trade ties. Sources say that Brexit negotiations are heading for a catastrophic breakdown unless the EU signals this week that it will allow talks to move on to trade
- China’s central bank governor said the economy could grow 7% in the second half of this year, accelerating from the first six months and defying widespread expectations for a slowdown. The uncharacteristically explicit growth forecast by Zhou Xiaochuan came just days ahead of a twice-in-a-decade Communist Party Congress.
- The BoE confirmed its plans to take over the administration of an important interest rate benchmark in April 2018. April 20 of next year will be the last day that the Wholesale Market Brokers’ Association will tabulate and publish the Sterling Overnight Index Average (Sonia), the BoE said.
- Support for billionaire Andrej Babis’s ANO party dipped ahead of a Czech election on Oct. 20-21, but the party maintained a double-digit lead over its closest rival and remains favourite to lead the next government.
Rates
Bund outperforms US Note future in rather thin trading
German Bunds outperformed US Treasuries today. Fed chairwoman Yellen reiterated over the weekend confidence that inflation will move to target next year, warranting more gradual rate hikes. Her message slightly weighted on US Treasuries as did the only eco item on today’s agenda. The US empire manufacturing for October beat consensus, matching the highest level since 2009. Some European election-related uncertainty might have been at play as well with the (expected) Austrian shift to the right, the (unexpected) outcome of German regional election (Lower Saxony) and the lasting political deadlock between Spain and Catalunya.
Catalan president Puigdemont refused to clarify whether he declared the region independent last week, missing a first Madrid deadline. Puigdemont called again for dialogue, but Madrid immediately answered that dialogue was only possible within the Spanish legal framework. The Catalan president now has three days to change his mind. Otherwise, the Spanish government will trigger article 155, stripping the Spanish region from its autonomy. The Spanish equity market underperformed, but the bond market didn’t.
At the time of writing, the German yield curve bull flattens with yields 0.1 bp (2-yr) to 2 bps (30-yr) lower. US yields trade 1.6 bps (30-yr) to 2.2 bps (5-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal (+3 bps) underperforming.
Currencies
Dollar going nowhere. Euro ignores Catalan tensions
There were few eco data in EMU and the US today. The dollar held up well despite Friday’s ‘soft’ US CPI data. Catalan uncertainty weighed mostly on Spanish assets. The impact on other European markets was limited, but EUR/USD struggled not to fall below 1.18. USD/JPY held a tight range in the upper half of the 111 big figure. The dollar profited slightly from a very strong Empire manufacturing survey. EUR/USD trades close to 1.18. USD/JPY hovers just below 112.
The established equity rally continued in Asia. Major central bankers met in Washington this weekend. They saw a further improvement in the global economy. Yellen reiterated that she expects soft inflation readings not to persist. Also ECB top-policy makers expect inflation to pick up. The BoJ indicated to pursue ongoing aggressive monetary easing, but BoJ Kuroda warned that markets might be too complacent when pricing geopolitical risks. USD/JPY profited only modestly from CB signals of ongoing policy divergence between the US/EMU and Japan or from the risk rally. The pair hovered in the 112 area. EUR/USD traded in the low 1.18 area
Early in European dealings, the headlines of a letter of Catalan Leader Puigdemont to Spanish PM Rajoy hit the screens. He didn’t answer Spain’s question whether he has declared independence, but defended its mandate to do so. An institutional confrontation later this week is still on the cards. EMU/German yields declined slightly more than US ones. EUR/USD lost a few more ticks below the 1.18 handle, but the impact on global markets remained very subdued. Euro selling also evaporated. EUR/USD returned to the 1.18 pivot. Spain repeated that Catalonia has until Thursday to ‘ rectify’ its independence call.
Early in US dealings, there were tentative signs that the dollar could feel some headwinds. However, the Empire manufacturing survey climbed from 24.4 to 30.2, a very strong level (matching the highest since 2009). The report blocked any potential USD losses. The dollar trades little changed in a daily perspective. Maybe this is slightly disappointing for USD bulls given the US data, the ongoing constructive risk sentiment and Catalan uncertainty.
Sterling in a limbo as UK PM May and EU’s Juncker meet
There were few eco data in the UK today. Key data including tomorrow’s UK price data will be important input for the BoE as it debates the need for a rate hike in the coming months. In the meantime, the focus remained on Brexit. UK PM May went to Brussels today and will meet EU commission president Juncker and EU Chief Brexit negotiator Barnier at CET 18.30. Sterling initially gained a few tics on the announcement of May’s Brussels’ trip, hoping on a positive outcome. However, this hope was torpedoed by comments from ‘sources close to the UK government’. According to these rumours, Brexit negotiations are heading for a catastrophic breakdown unless the EU signals this week it will allow to move to talks on trade and the transition period. EUR/GBP returned to the 0.89 area. Cable traded in the 1.33 area before the Brexit headlines, but returned south again, currently trading in the 1.3265/70 area. (FX) markets look out for the outcome of the next phase in the political poker game between the UK and the EU.
