• Financial markets recovered from a weak start of the week, ahead of Mr. Powell’s speech this afternoon, led by the resumption of U.S.-China trade negotiations, the withdrawal of the Hong Kong extradition bill, lower hard Brexit risk, the new European-friendly government coalition in Italy and the solid U.S. services sector. The latter was offset by a weaker U.S. factory activity and payrolls (see).
  • Expectations of further monetary policy easing also helped risky assets. Markets assign a 100% probability of 10 bps depo rate cut, but the probability of 20 bps cut remains close to 50%. A 25 bps Fed rate cut is also a virtual certainty in September. Moreover, today the PBoC announced that it will cut the required reserve ratio for all banks, injecting liquidity into an economy facing both a domestic slowdown and trade-war headwinds (see). In addition, BoJ’s Kuroda suggested he is open to lower interest rates further into negative territory.
  • Safe-haven assets declined as global market sentiment improved. Yields climbed sharply across the yield curve, especially in longer tenors (10Y yields: +6.2 bps in the U.S. and +7.3 bps in Germany). In the European peripheral, Italy’s risk premium narrowed sharply due to lower political uncertainty (-20 bps to 150) while the risk premium in Spain was broadly unchanged. EM risk premium also narrowed but only partially, reverting the deterioration seen in August.
  • In FX markets, safe-haven currencies depreciated (JPY -0.5%), while the USD halted its recent appreciation trend (-0.7%). The GBP appreciated (+1.2%), while the implied volatility in the GBPUSD only inched down modestly, suggesting that concerns over the Brexit impact remain in place although the chance of an imminent Brexit has moderated this week. EM FX appreciated across the board, with more liquid ones appreciating above 2% (TRY +1.9%, MXN +2.4% and BRL +2.1%). The TRY strengthened with positive developments in Turkey’s inflation.
  • Equity markets increased, with the banking sector outperforming led by a rebound in yields and yield slope, while implied volatility declined (VIX 16, -3 pts). EM equity outperformed DM markets.

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