• Demand for sovereign bonds returned this week, with a heightened geopolitical risk (following the oil field attack), liquidity stress in the US repo market and central banks easing their rhetoric.
  • Oil saw a record jump after Saudi attack: A coordinated drone attack on Saudi Arabia’s key oil production facilities last weekend disrupted around 6% of global supplies, pushing Brent prices up nearly 20% to $71.9/b. While prices have eased since, uncertainties about how long it would take for Saudi Arabia to restore supply and the geopolitical risk (especially on how Saudi Arabia and the US respond to the attack, which they blame on Iran) may limit the correction.
  • Global central banks maintain easing rhetoric. After the Fed cut interest rates and left the door open to further cuts this past week (see), markets still price in 72% probability of a 25bps Fed interest rate cut in December, while expectations for an additional depo rate cut by the ECB remain on the table. Other central banks have also echoed similar messages: The BoJ and BoE hinted at easing measures if needed, while the SNB offered banks additional relief from its negative interest rates. Meanwhile, the Norwegian Central Bank said it is close to ending its tightening cycle. Several EM central banks have also eased monetary policy.
  • The US short term funding markets suffered liquidity stress during the week, boosting the US repo and leading the Fed to inject short term funds through its system open market operations. The mismatch seems to be caused by an idiosyncratic factor rather than a real cash shortage (a combination of factors took place: tax payments, large Treasury coupon settlement and some disruption in the dollar market due to the oil strike). However, it seems that these types of episodes could be more recurrent in the future due to regulatory limitations for dealers, lower banks reserves and growing Treasury funding needs.
  • On the economic front, the US economic indicators showed domestic demand remains robust, while EU confidence improved in the Eurozone but is still at low levels. On the contrary, indicators in China pointed to a significant slowdown in economic activities. Regarding global growth OECD its outlook below 3% (to 2.9 from 3.2%) due to trade conflict. These would be the weakest annual growth rates since the financial crisis, with downside risks continuing to mount.
  • Bond yields declined: The US 10Y fell by 12bps (below 1.80%, while 10 German yield declined -7bps. The Spanish risk premium remained stable, despite the high probability of snap elections, while Italy’s widened (by 5 bps to 139) after prospects of further government instability.
  • In FX markets the US dollar remained broadly stable as the Fed rate cut this week was already priced in, regardless of the split between Fed members over Wednesday’s decision. The GBP appreciated after Junker said the Brexit deal was possible before October 1, but retreated after as some official downplay expectations. The GBPUSD implied volatility kept increasing, reflecting uncertainty. Most EM FX depreciated, especially the TRY dragged by a surge in oil prices (8% after the attack), while the BRL depreciated sharply (-2%) as the central bank signaled more easing.
  • Equity markets showed minor changes, while implied volatility remained contained (VIX 14). European banks requested only EUR 3.4bn at first TLTRO-III, which is a very low demand compared to previous auctions.

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This document was prepared by Banco Bilbao Vizcaya Argentaria’s (BBVA) Research Department on behalf of itself and its affiliated companies (each a BBVA Group Company) for distribution in the United States and the rest of the world and is provided for information purposes only. The information, opinions, estimates and forecasts contained herein refer to that specific date and are subject to changes without notice due to market fluctuations. The information, opinions, estimates and forecasts contained in this document have been gathered or obtained from public sources believed to be correct by the Company concerning their accuracy, completeness, and/or correctness. This document is not an offer to sell or a solicitation to acquire or dispose of an interest in securities.

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