Sunset Market Commentary

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Wind died down on global core bond markets today after US Treasuries jumped higher at the last hours of yesterday’s session. The German Bund caught up with US Treasuries at European openings, moving substantially higher, but paired those gains through the day. Both the Bund as the US Treasuries are hovering near yesterday’s closings. Noise around Italian budget discussions didn’t change tone as EU warns Italy for long-term repercussions of current budget proposal. BTP’s moved south throughout the day. US Treasuries lost some ground ahead of the US CPI’s but recovered mostly as inflation numbers were slightly weaker than expected. Headline inflation for September rose 0.1% MoM (2.3% YoY), less than consensus expectation of a 0.2% gain (2.4% YoY). Core inflation (0.1% MoM, 2.2% YoY) remained stable while a small increase was expected. While rising yields kept investors on their toes in previous days, today’s bond trading moves proved to be rather insignificant. The German yield curve bull flattens with yield changes ranging between -1.0 bps (2-yr) and -2.6 bps (30-yr). US yields moved north with changes from +0.3 bps (10-yr) to +0.7 bps (30-yr). Italian 10-yr spread vs Germany widened 11 bps to move back north of 305 bps in total. Greek and Spanish spread over Germany widen both with 6 bps.

After trending higher in early trading hours, EUR/USD lost some of its mojo before edging up again in the run up to the minutes of the September meeting. These revealed increasing worries of the global trade war, in particular on EMU exports. Yet most governors are still convinced of underlying inflation picking up and believe the EMU economy can deal with the scaling back of the APP by the end of this year. As this message is well known to investors, attention soon shifted to US CPI’s. Yesterday’s risk-off triggered a potential repricing of US assets and caused a small dollar “exodus”. Higher (than expected) inflation had the potential to extend this move as this could possibly increase the projected pace of rate rises. However, both headline and core measures disappointed slightly, pushing EUR/USD back higher. The pair tested the 1.16-area but lost momentum soon afterwards. Slower inflation might have soothed investors and provide the dollar some downside protection. At the same time, Italy probably remains an important barrier for the common currency. The pair is currently filling bids at 1.1564. USD/JPY is trading stable around 112.30, holding on to yesterday’s gains.

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Pound trading was largely technical in nature as there were no important data to steer markets. Concerning Brexit “there is no breakthrough yet”, but “intensive technical negotiations are continuing”, the spokesman for the European Commission said today in clarifying Michel Barnier’s prudent yet optimistic speech to the European Parliament. So the investors’ quest for clues whether Tuesday’s report suggesting a possible (yet preliminary and partial) deal is feasible, continues. In the meantime, markets are likely to eschew any meaningful sterling positions, especially having in mind the important brexit summit the 17th of October. EUR/GBP traded with a tentative positive bias, recovering part of previous losses, ending a 6-day losing streak for now. Moves remained technically insignificant though. The pair trades at 0.875, up from 0.873. Cable (1.324) is gaining a few ticks.

News Headlines

Swedish September inflation increased more than anticipated. Headline inflation reached 2.5% YoY vs. 2.3% expected, up from 2.2% in August. Core inflation ended up at 1.6% YoY. The data supports the Riksbank’s case for a rate hike rather sooner (December) than later (February 2019). The Swedish krona jumped.

The Northern Irish Democratic Unionist Party, or DUP, has said it would consider supporting a vote of no-confidence if May agrees to EU checks on goods entering the region, which is a red line for the party. PM May is in need of the support of the DUP to back her proposal in government.
 
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