Sunset Market Commentary

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Global core bonds gain ground today as earlier losses were paired throughout the day. Italian budget perils remained today’s main risk driver. BTP futures continued Friday’s rally when EU Commissioner Moscovici was surprisingly upbeat and rating agency Moody’s downgraded Italy’s rating by one step to Baa3, avoiding junk territory and changed its outlook to ‘stable’. Italian spread lowered back south of 300 bps. Other European debt paper followed. However, the move didn’t last today. Italian government responded to EU concerns saying it won’t alter its 2019 budget but will reconsider if slower-than-expected economic growth would weigh on revenues. At noon, intra-day gains of BTP’s were paired. With lack of economic data, German bunds were mainly driven by Italian news and mirrored the BTP’s. Earlier losses didn’t hold and Bunds are now even recording gains. Bundesbank said German growth likely slowed down in Q3 as carmakers struggle with a switch to new emissions testing. US Treasuries opened steady with an upward trend afterwards. President Trump signaled he might abandon a key nuclear arms-control pact with Russia, but that had little impact on Treasuries. The US yield curve bull flattens with changes ranging from -0.4 bps (2-yr) and -1.0 bps (30-yr). German yield curve edges lower with changes between -1.4 bps (2-yr) and -1.7 bps (5-yr). European spreads over Germany are currently little changed.

The Italian BTP rally on Friday following EU Commissioner Moscovici’s conciliatory language also created spill overs for the common currency. The euro was keen to continue its upward trend today. However, despite a moderate risk on environment, momentum soon stalled as investors pondered whether Friday’s move hasn’t gone too far too fast. After hitting an intraday high at 1.55, things went awry for EUR/USD, reversing the trend and following Italian bonds’ downtrend in lockstep. Investors probably also stack dollars rather than euros ahead of this week’s material events (EC approval or rejection of the Italian budget, EMU PMI’s, ECB decision …). EUR/USD is currently filling bids at the 1.147 zone. USD/JPY does manage to gain some ground, trading higher in the 112.75 area.

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In an attempt to break the stalemate, PM May’s brexit team cracked open a door over the weekend to an indefinite transition period as an alternative to the EU’s backstop. That would keep the whole of the UK tied to the EU customs union and would render a solution for the Irish border issue redundant. This is indeed an option EU chief negotiator Barnier has offered multiple times. While this concession has the potential to unlock negotiations abroad, it remains to be seen whether such an indefinite transition period would ever pass the UK Parliament. The political uncertainty weighed on the pound today. The Northern Irish DUP expressing support for amendments to Northern Ireland legislation that would make the EU backstop illegal added more fuel to the fire, as did rumors about a ‘centrist’ Tory MP saying he would send a letter of no confidence in PM May. EUR/GBP trended north, nesting comfortably in the 0.885-area as markets await PM May’s speech before Parliament later this afternoon. Cable dipped below the 1.30-handle.

News Headlines

The Bundesbank signaled Germany’s Q3 growth might come to a temporary halt, suggesting the first quarter without expansion in more than 3 years. The economy has been losing momentum since global trade protectionism influenced its export-oriented economy and difficulties for its car industry adapting to new emissions testing.

Argentina’s new central bank governor, Guido Sandleris, has declared it was “definitely too soon” to say whether stability had returned to the country. The peso slid dramatically this year and the IMF had to grant an emergency loan of more than $50 billion. He warned emerging markets for rising global interest rates and a possible US-China trade war.
 
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