Sunset Market Commentary

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Trading in global core bonds was confined to tight ranges today; with German Bunds outperforming US Treasuries. Bunds even gain some ground. US Treasuries are still sliding a little bit on yesterday’s FOMC Meeting Minutes, with the Fed hinting more rate hikes are ahead. Short-term UST maturities underperform. Today’s risk sentiment was risk-off with Asian equities closing this morning’s session with losses. European indices continued that trend, albeit at a more modest pace. Brexit uncertainty remains in the picture after UK PM May headed home yesterday with no progress whatsoever. German Bunds gain some ground on safe haven flows. EU’s Moscovici will deliver a letter to Italy’s PM Tria today, voicing concerns on the budget proposal. US eco data had no influence on trading as Jobless claims and the Philadelphia Fed Business Outlook printing slightly stronger than expected. US yields rise with changes ranging from +0.4 bps (10-yr) and +1.5 bps (2-yr) at the time of writing. The German yield curve steepens with shifts from -1.0 bps (2-yr) and +0.4 bps (30-yr). 10-yr yield spread changes vs Germany widen by 11 bps for Greece, 4 bps for Spain and 3 bps for Italy.

Yesterday, the dollar gained traction as the minutes of the September meeting indicated that the Fed is likely to continue hiking rates at least in the short-to-medium term. US yields rose and the spread between US and German yields reached a multi-decade peak, supporting the US dollar. This morning, it looked that this trend of USD strength would continue as Asian (emerging) markets remained under pressure. EUR/USD opened weak in Europe and tried to extend its decline below 1.15. However, sentiment on European (equity) markets was not that negative compared to Asia. EUR/USD bottomed even as interest rate levels between the US and German remained at record levels. US eco data (Philly Fed outlook, claims) came out on the stronger side of expectations but hardly affected USD trading. The dollar is holding its recent gains, but for now there is no further progress beyond technically relevant levels. EUR/USD currently trades in the 1.15 area. USD/JPY hovers in the 112.50 area. There is still not one theme/issue (China, Saudi Arabia, Italy …) strong enough to give USD trading clear directional guidance.

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There was no big to tell on EUR/GBP trading, despite all the Brexit noise in the wake of yesterday’s EU Brexit summit. The pair held an extremely tight sideways range approximately between 0.8770 and 0.8795. UK PM May indicated that she considered the idea of prolonging the transition period to unlock current Brexit stalemate. Even this indication for a solution failed to inspire sterling trading. Investors apparently are tired to be haunted by diffuse Brexit communication and stay sidelined until there is ‘real’ news. This morning, UK September retail sales were reported weaker than expected (-0.8% M/M) mainly due to lower food sales. Sterling temporarily lost a few ticks but the move also petered out soon. EUR/GBP is trading in the 0.8770 area. Cable hovers around the 1.31 level.

News Headlines

The European Commission will deliver the Italian government a letter tonight in which they will ask Rome to “clarify” the budget draft. The 5SM-Lega government has until early next week to provide further details before the EC decides whether Italy should revise its budget or not.

Spanish bank shares are losing up to 4%. The sector is facing an increased tax burden after the country’s Supreme Court ruled that the banks must pay mortgage-documentation taxes and not the borrower, as it used to be the case.

Olli Rehn sees the ECB’s hiking cycle to kick off in Q4 of 2019 if the economy develops as currently expected. Policy should remain simulative for now as core inflation is a mere 1% while the 2% headline inflation is largely driven by energy prices. The Finnish ECB-governor also thinks markets are reading the bank’s forward guidance correctly.
 
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