• Investors remained cautious in a volatile session underpinned by increasing geopolitical frictions.
  • Fresh conflict between the U.S. and China over Hong Kong may halt the recent progress in trade talks as China threatened to retaliate if the U.S. approves a legislation supporting protests in Hong Kong .
  • Moreover, China reportedly wants a rollback in U.S. tariffs before purchasing as much as $50bn of U.S. agricultural products, while U.S. President Trump said a limited deal would not be signed until the meeting in Chile next month.
  • Some positive steps towards a potential fiscal support in Germany. Chancellor Merkel’s party begins to soften opposition to fiscal stimulus if their economic situation darkens further.
  • Downbeat consumer data in the U.S. Retail sales unexpectedly fell in September (-0.3% MoM, consensus 0.3% MoM, prior 0.6% MoM), while data from the prior month was upwardly revised by 0.2%. In this context, market expectations of a Fed rate cut by the end of this month rose from 73% to 85% after weak U.S. retail sales. In EMU, final September’s CPI were downwardly revised from 0.9%YoY to 0.8%YoY, while Core CP rose 1%YoY in line with flash figures and with expectations.
  • The U.S. repo rates consolidated yesterday’s increase above 2% (GC rate 2.15% vs 2.37% yesterday), while Fed liquidity provision were oversubscribed, although the Fed increased the amount injected (75bn, demanded 80bn in overnight repo), after yesterday’s injection amounting to 67.5bn in overnight repo and 20bn in a 14-day repo.
  • Sovereign bonds yields were mixed (10Y US -2bps, 10Y GER +3bps). The yield on the 10Y UST bond dropped earlier driven by the uncertainty in trade talks, weak data and geopolitical risks. On the other hand, European sovereign bond yields increased in general on the back of recent major breakthrough on Brexit and German government more prone to use fiscal policy to support growth if needed. However, 10Y Italian bond yield dropped with its risk premium narrowing (-4bps) after the submission of its budget plan to the European Commission. The Italian government will keep the budget deficit at a 2.2% of its GDP.
  • Both euro and the sterling fluctuated amid Brexit negotiations and mixed Eurozone CPI data. The sterling extended its gains, leading the way among the G10 (GBPUSD +0.5%), alongside the euro (EURUSD +0.4%). Meanwhile, the USD weakened (DXY index -0.3%), dragged down by disappointing retail sales. Elsewhere, LatAm currencies were mixed with the Brazilian real leading the gains (USDBRL +0.4%), while the Turkish lira gained 0.7% against the USD as U.S.-Turkey talks will continue.
  • European and U.S. stock markets were steady despite some better-than-expected bank earnings.

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