- European equities opened strong, but gradually slid lower, currently trading with minor losses. US equities open little changed.
- Production across German industry declined in September (-1.6% M/M) after a strong rise in the previous month (2.6% M/M), with steep falls reported in both capital goods and energy. Given the strong order intake of recent months, the decline should be a one-off.
- Eurozone retail sales easily beat expectations in September, pushing the annual growth rate to the highest level since July 2015 in the latest sign of improving conditions across the currency bloc. Retail sales rose by 3.7% Y/Y in September beating expectations (2.9% Y/Y) and the previous month’s result (2.3% Y/Y).
- The ECB’s chief banking supervisor, Nouy, said that about 20 banks have applied for European banking licences in the wake of the UK’s decision to quit the European Union.
- France has called for tax havens to be stripped of any right to seek help from the IMF and other global financial institutions in response to the "Paradise Papers" revelations.
- Mario Draghi has called on banks to cut costs instead of blaming the ECB’s monetary policy for poor profitability. "There is little evidence that negative rates are undermining banking profitability."
- President Trump toned down his harsh rhetoric toward North Korea during a visit to Seoul, telling reporters the Pyongyang regime should "come to the table" to make a deal and refusing to rule out direct talks.
Rates
Dull core bond trading session
Core bonds moved sideways (Bund: 30 ticks band) in an uneventful session devoid of key economic data. At the time of writing, German yield changes vary between -0.3 and +0.5 bp. US yields are flat (2-yr) to 0.4 bp higher. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed substantially by 2 to 6 bps. Traders reported strong buying in the peripherals, but we are not aware of a particular driver.
The Bund tried to rally towards the end of the morning session, aiming to test the contract high at 163.42, but the attempt missed dash. The Bund returned south when a "source" article on the ECB (see below) suggested that some ECB heavyweight governors objected to the APP proposal that was ultimately accepted last week. US Treasuries didn’t show more vigour. European equities gradually slid lower during the entire session after a strong opening, but there was little impact on bonds. US investors prepare to the first leg of the three-part refunding operation concerning a $24B 3-yr Note auction later today.
According to a "sources" article, three ECB heavyweights pushed at the last ECB meeting to alter a commitment to keep buying bonds until the "council sees a sustained adjustment in the path of inflation consistent with its inflation aim." ECB governors Couere, Weidmann and Villeroy recommended tying the overall level of monetary stimulus rather than just asset purchases to the outlook of prices. The broadening of the language would have potentially meant the ECB could terminate the bond purchases even if inflation failed to pick up. The change of the guidance didn’t make it, but it suggests that opinions on the APP are far from unanimous. A fourth ECB member, board member Lautenschlaeger, revealed she wanted a "clear exit" from the programme and ECB Weidmann already expressed his opposition to the outcome the day after the ECB decision.
Currencies
EUR/USD sets (minor) post-ECB low
Trading in EUR/USD and USD/JPY was again technical in nature. There were no important data in EMU or in the US. Interest rate differentials and/or equities were also unable to give guidance. EUR/USD finally set a new post-ECB correction low, but follow-through losses were modest. USD/JPY still doesn’t go anywhere holding near the 114 pivot.
Overnight, several Asian equity indices including the Nikkei traded at multi-year highs. Higher oil and commodity prices supported energy and materials’ stocks. USD/JPY returned north of 114, but a retest of the 114.49/73 resistance didn’t occur. So, the USD/JPY performance remained mediocre given the stock market rally. EUR/USD was little changed in the 1.1605/10 area.
The EMU eco data were mixed. German September production data and the retail PMI’s from several EMU member states were weaker than expected. Later in the session, the ‘official’ September EMU retail sales printed very strong at 0.7% M/M and 3.7% Y/Y. We didn’t see a direct impact from thee data on EUR/USD. The pair drifted gradually south from the start of the EMU trading session. Recent inability to move away from the post-ECB low finally caused some additional EUR/USD longs to throw in the towel. EUR/USD set a minor new correction low. Still, the move developed in a very gradual way.
Euro selling slowed in early US dealings. EUR/USD trades currently in the 1.1570 area. USD/JPY was again unable to go for a retest of the 114.49/73 resistance. There was no additional interest rate support for the dollar. US and European equities were also unable to maintain the positive Asian momentum, preventing a further decline of the yen. USD/JPY is little changed in the 114.10/15 area.
Sterling follows broader euro and USD trends
Sterling also showed a diffuse trading pattern today. The UK currency ceded ground against the dollar but gained a few ticks against an overall soft euro. The UK eco data were in line (Halifax house prices) to weaker than expected (very poor BRC retail sales). The impact of the data was not big, but the poor BRC sales, probably aborted the sterling rebound on Friday and yesterday. EUR/GBP dropped temporary below 0.8800 but trades again in the 0.8815 area. The loss in cable is more substantial (1.3130 from 1.3075 at the open overnight). In the end, the intraday swings in cable and in EUR/GBP were primarily USD and euro moves rather than sterling inspired price action.
