Thursday, 10 October 2019

P. 1

Rates: Key meetings in the US and the UK

Rumours and headlines around the two-day high level trade talks in Washington remain balanced at best. Investors nevertheless took a more optimist approach yesterday. The discussions will remain key for trading today through risk sentiment. The meeting between UK PM Johnson and UK PM Varadkar is a wildcard.

Currencies: Will trade talks help EUR/USD to break the 1.10 barrier?

EUR/USD again stalled ahead of the 1.10 barrier yesterday. Today, the focus for global FX trading will be on the US/China trade talks. This morning’s gyrations might be a precursor for FX/global market volatility today and tomorrow. A positive outcome might trigger a ‘classic’ risk repositioning with USD/JPY, EUR/JPY and EUR/USD rebounding. Might …

Calendar

• WS recouped earlier losses amid raised trade hopes that the US and China

would settle some economic disputes (Nasdaq outperformed, 1.02%). Asian markets are trading mixed ahead of trade talks, China outperforms (+1%).

• US considers rolling out a previously agreed currency pact with China as part of a partial deal that could see a tariff increase next week suspended, Bloomberg reported. The accord would be part of a first-phase agreement with Beijing.

• Minutes from the September FOMC meeting showed increased downside risks to growth due in part to trade concerns but some sought to signal the limits of the current easing cycle. Policy makers appear divided on the future policy path.

• US job openings declined in August to their lowest level since March 2018, offering another sign of labour market cooling. Companies have eased hiring amid a dimming economic outlook and struggle to attract qualified workers.

• PM Boris Johnson has been issued an ultimatum by the EU ahead of a meeting with Ireland’s prime minister Varadkar today in a last bid for a Brexit deal: accept that NI remains in the EU customs union or there will be no agreement.

• The Fed will announce today that it has decided against forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch, FT reported.

• In today’s economic calendar the start of US-China trade negotiations takes centre stage. The US publishes September CPI data. The ECB accounts of its September policy meeting are due today.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 10 October 2019

P. 2

Key meetings in the US and the UK

Trade pessimism cleared way for some optimism yesterday even if rumours/headlines around upcoming negotiations in Washington remain balanced at best. Main European and US indices closed up to 1% higher. Core bonds grinded lower with US Treasuries marginally underperforming German Bunds. The US and German yield curves both bear steepened. US yields rose by 4.4 bps (2-yr) to 5.5 bps (30-yr) while German ones added 2.7 bps to 5 bps. Eco data, supply or central bank talk had no intraday impact. US JOLTS job opening fell to their lowest level since March 2018, hinting at a momentum loss in the strong US labour market. The US $24bn 10-yr Note auction went solid. Fed Minutes showed the split within the US central bank on how to proceed with insurance rate cuts, as highlighted in the latest dot plot. Several officials made a push for the FOMC statement to provide more clarity about when the recalibration of the policy rate in response to trade uncertainty would likely come to an end. That could be something for the October or December statement. Latest data and comments from officials suggests willingness to cut policy rates a third consecutive time on October 30.

Asian stock markets trade mixed this morning with China (+0.5%) outperforming. Action is choppy, again because of conflicting headlines on the US-Sino trade talks. Core bonds and the Japanese yen hover near yesterday’s closing levels.

US weekly jobless claims and CPI inflation feature on today’s eco agenda, but won’t be decisive for trading. Minutes of the previous ECB will highlight the split within central bank on the September easing package. They’ll reflect that the bar to take additional steps is extremely high with all fingers pointing in the direction of fiscal policy to become the next firefighter. Risk sentiment about the 2-day high level trade talks in Washington will be the main driver. We’d still favour taking a cautious approach. The outcome of the meeting between UK PM Johnson and Irish PM Varadkar is a wildcard. It could officially kill the final hope on an October Brexit deal. The US Treasury’s 30-yr Bond auction might overshadowed by all this event risks.

Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Both fell short of really testing first resistance levels, respectively at -0.41% and 1.94% as disappointing eco data ended the run. Going forward, we expect range trading with August lows protecting the downside (German 10y: -0.73%; US 10y: 1.43%).

Rates

US yield -1d2 1.47 0.055 1.39 0.0510 1.58 0.0530 2.08 0.05

DE yield -1d2 -0.76 0.035 -0.76 0.0410 -0.55 0.0530 -0.02 0.05

A

German 10-yr yield: sideways trend channel between -0.73% and -0.41%

US 10-yr yield: sideways range between 1.43% and 1.94%. Drift to lower bound on the back of recent eco data weakness and

geopolitical uncertainty

Thursday, 10 October 2019

P. 3

EUR/USD: US-China trade talks to trigger a break?

Brexit stalemate pushing EUR/GBP toward the 0.90 barrier

Will trade talks help EUR/USD north of 1.10?

EUR/USD trading was order-driven and technical in nature yesterday. Global investors saw the glass half full on the US China trade talks. Sentiment was constructive. EUR/USD came within reach of the 1.10 barrier, but there was again no trigger for a real test. USD/JPY kept an upward bias. The Fed minutes were not that soft. The FOMC considered a possible end to the mid-cycle adjustment. The USD reaction was limited. Markets apparently considered the situation changed after recent US data. EUR/USD finished at 1.0971. USD/JPY closed at 107.48. Overnight, (Asian equity) markets were haunted by conflicting/diffuse headlines on the Sino-US trade negotiations. An initial risk-off was reversed after press reports that both parties were coming closer on a currency clause in a first partial deal. Asian equities are trading mixed with China outperforming. The yuan rebounds (USD/CNY 7.1150). USD/JPY is holding a tentative upward bias (107.50). EUR/USD returned to the high 1.09 area (1.0985 currently). Today, there are (second tier) data in Europe. In theory, the US CPI has more market moving potential (PPI was soft earlier this week). However, today and tomorrow, global market moves will be dominated by headlines from the trade negotiations in Washington. Positive news probably would lead to a ‘classic’ FX risk-on repositioning move with USD/JPY, EUR/JPY and EUR/USD moving higher. However, the noise this morning might be a precursor for market volatility today and tomorrow. Last week, the dollar declined off recent tops after poor US ISM’s and a loss of interest rate support. Still, USD losses remain modest even as markets anticipate further Fed easing this and next year. For now, the poor EMU eco hamper any sustained euro gains. EUR/USD is trading off recent low (1.0879) but is holding below the trendline (today near 1.1010). More soft US data and/or more outspoken ‘engagement’ of the Fed is probably needed for sustained EUR/USD gains. A constructive outcome of the trade talks or on Brexit might be a euro positive, too. Press headlines on (the absence of) progress in the Brexit negotiations triggered the ‘standard’ intraday swings in EUR/GBP. At the end of the day, EUR/GBP still closed in the high 0.89 area. UK trade and production data probably will have limited impact on sterling trading. The focus in the Brexit process today turns to meeting between UK PM Johnson and Irish PM Varadkar. We don’t anticipate a high-profile break-through, yet.

Currencies

R2 1.1533 -1dR1 1.1448EUR/USD 1.0971 0.0014S1 1.0864S2 1.0778

R2 0.93067 -1dR1 0.91EUR/GBP 0.8990 0.0024S1 0.8500S2 0.8314

Thursday, 10 October 2019

P. 4

Thursday, 10 October Consensus Previous US 14:30 CPI MoM/YoY (Sep) 0.10%/1.80% 0.10%/1.70% 14:30 CPI Ex Food and Energy MoM/YoY (Sep) 0.20%/2.40% 0.30%/2.40% 14:30 Real Avg Hourly/Weekly Earning YoY (Sep) --/-- 1.4%R/1.1%R 14:30 Initial Jobless Claims 220k 219k 14:30 Continuing Claims 1651k 1651k Japan 01:50 PPI MoM/YoY (Sep) 0.0%A/-1.1%A -0.30%/-0.90% 04:00 Tokyo Avg Office Vacancies (Sep) -- 1.71 UK 01:01 RICS House Price Balance (Sep) -2%A -4% 10:30 Monthly GDP MoM/3M-3M (Aug) 0.0%/0.1% 0.30%/0.00% 10:30 Industrial Production MoM/YoY (Aug) 0.1%/-0.8% 0.10%/-0.90% 10:30 Manufacturing Production MoM/YoY (Aug) 0.2%/-0.4% 0.30%/-0.60% 10:30 Construction Output MoM/YoY (Aug) -0.4%/-0.2% 0.50%/0.30% 10:30 Index of Services MoM/3M-3M (Aug) -0.1%/0.2% 0.30%/-0.20% 10:30 Trade Balance GBP/Mn (Aug) -£1050m -£219m Germany 08:00 Trade Balance (Aug) 18.8b 21.6bR 08:00 Current Account Balance (Aug) 17.9b 22.1b 08:00 Imports/Exports SA MoM (Aug) 0.5%/-1.0% -1.6%R/0.8%R France 08:45 Industrial Production MoM/YoY (Aug) --/-- 0.30%/-0.20% 08:45 Manufacturing Production MoM/YoY (Aug) --/-- 0.30%/-0.30% Norway 08:00 CPI MoM/YoY (Sep) 0.5%/1.5% -0.70%/1.60% 08:00 CPI Underlying MoM/YoY (Sep) 0.5%/2.1% -0.60%/2.10% 08:00 PPI including Oil MoM/YoY (Sep) --/-- -0.30%/-9.40% Sweden 09:30 CPI MoM/YoY (Sep) 0.3%/1.3% -0.40%/1.40% 09:30 CPIF MoM/YoY (Sep) 0.3%/1.2% -0.40%/1.30% 09:30 CPIF Excl. Energy MoM/YoY (Sep) 0.3%/1.5% -0.40%/1.60% Events 10OCT Fed to vote on measure to ease liquidity and capital rules 10OCT Chinese Vice Premier Liu He visits Washington for trade talks 10OCT EU Economic and Financial Affairs Council hold meetings in Luxembourg 13:30 ECB Accounts of September Policy Meeting 18:30 Fed’s Daly Takes Part in Communicty Engagement Discussion 19:00 US to Sell 30-Year Bonds 21:30 Fed’s Daly Speaks at Business Lunch in San Diego 23:30 Fed's Mesters Speaks at John Carroll University (non-voter)

Calendar

Thursday, 10 October 2019

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 1.58 0.05 US 1.47 0.05 DOW 26346.01 181.97DE -0.55 0.05 DE -0.76 0.03 NASDAQ 7903.743 79.97BE -0.23 0.04 BE -0.67 0.03 NIKKEI 21551.98 95.60UK 0.46 0.04 UK 0.37 0.05 DAX 12094.26 124.06

JP -0.21 -0.01 JP -0.31 0.00 DJ euro-50 3462.11 29.35

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.46 1.42 0.60 Eonia -0.4670 0.00005y -0.39 1.39 0.58 Euribor-1 -0.4640 -0.0010 Libor-1 1.9388 0.000010y -0.12 1.49 0.64 Euribor-3 -0.4180 -0.0010 Libor-3 2.0095 0.0000

Euribor-6 -0.3840 0.0030 Libor-6 1.9634 0.0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1.0971 0.0014 EUR/JPY 117.93 0.60 CRB 173.07 -0.25USD/JPY 107.48 0.39 EUR/GBP 0.8990 0.0024 Gold 1512.80 8.90GBP/USD 1.2206 -0.0013 EUR/CHF 1.0927 0.0046 Brent 58.32 0.08AUD/USD 0.6725 -0.0003 EUR/SEK 10.9256 0.0276USD/CAD 1.3333 0.0008 EUR/NOK 10.0655 0.0255

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