European reflation trade if Brexit hurdle is removed?

KBC Market Research Desk KBC Bank

Global core bonds walked a different path yesterday with German Bunds underperforming US Treasuries. Diverging headlines on Brexit sparked intraday volatility, but the bottom line remains that the EU and the UK are on the brink of a draft Brexit deal with the last hurdle remaining... Northern Ireland's status. Even if both parties reach an agreement at tonight's EU Summit, the litmus test will only come on Saturday with a potential key vote in UK Parliament. Convincing the Northern Irish DUP party seems to be the toughest nut to crack. Whatever, the prospect of seeing two years of uncertainty removed, weighed on the Bund. It could unlock delayed investments and rejuvenate European growth. The German yield curve bear steepened with this reflationary thought in mind. German yields added 1.3 bps (2-yr) to 3.8 bps (30- yr). The German 10-yr yield followed the 5-yr's example earlier this week, by surging above 1st important resistance (-0.41%). 10-yr yield spread changes vs Germany narrowed slightly with Greece and Italy outperforming (-5 bps).

US Treasuries eked out gains after disappointing US retail sales. The Fed's Beige book later showed that the US economy has only grown at a "slight to modest pace" with deterioration especially in manufacturing and agriculture. Voting Chicago Fed Evans later said that the Fed may want to cut rates again given all the uncertainties out there. US yields fell by 3.6 bps (5-yr) to 1 bp (30-yr) on a daily basis.

Asian stock markets trade mixed this morning. The German Bund and US Note future give no clear direction neither, suggesting a neutral start to European trading. General risk sentiment will again set the tone for trading. Expect your daily dose of volatile Brexit headlines ahead of tonight's EU Summit. The door for an accord will probably remain open, holding Bunds lower. The US eco calendar contains building permits, housing starts, weekly jobless claims and Philly Fed Business Outlook. (US) markets continue to react in an asymmetric manner, mainly moving on disappointments. US Treasuries can continue outperform Bunds. Q3 earnings and central bank speeches are wildcards.

Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Risk sentiment and eco data drove action within sideways ranges since. The German 10-yr yield broke above -0.41% as Brexit deal hopes surge. Target of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the steady decline between October and August stands at -0.24%.

Download The Full Sunrise Market Commentary

Author

KBC Market Research Desk

KBC Bank

EUR/USD meets initial support around 1.1800

EUR/USD remains on the back foot, although it has managed to reverse the initial strong pullback toward the 1.1800 region and regain some balance, hovering around the 1.1850 zone as the NA session draws to a close on Tuesday. Moving forward, market participants will now shift their attention to the release of the FOMC Minutes and US hard data on Wednesday.

GBP/USD bounces off lows, retargets 1.3550

After bottoming out just below the 1.3500 yardstick, GBP/USD now gathers some fresh bids and advances to the 1.3530-1.3540 band in the latter part of Tuesday’s session. Cable’s recovery comes as the Greenback surrenders part of its advance, although it keeps the bullish bias well in place for the day.

Gold hangs near one-week low; looks to FOMC Minutes for fresh impetus

Gold is consolidating just above the $4,850 level, having touched a one-week low on Tuesday, amid mixed cues. Signs of progress in US–Iran talks dent demand for the traditional safe-haven bullion. Meanwhile, rising bets for more Fed rate cuts keep the US Dollar bulls on the defensive and act as a tailwind for the non-yielding yellow metal. Traders also seem reluctant ahead of the FOMC Minutes, which would offer cues about the Fed's rate-cut path and provide some meaningful impetus.

RBNZ set to pause interest-rate easing cycle as new Governor Breman faces firm inflation

The Reserve Bank of New Zealand remains on track to maintain the Official Cash Rate at 2.25% after concluding its first monetary policy meeting of this year on Wednesday.

UK jobs market weakens, bolstering rate cut hopes

In the UK, the latest jobs report made for difficult reading. Nonetheless, this represents yet another reminder for the Bank of England that they need to act swiftly given the collapse in inflation expected over the coming months.

Ripple slides to $1.45 as downside risks surge

Ripple edges lower at the time of writing on Tuesday, from the daily open of $1.48, as headwinds persist across the crypto market. A short-term support is emerging at $1.45, but a buildup of bearish positions could further weaken the derivatives market and prolong the correction.