• Markets were very volatile during the week, with investors focused on how U.S.-China trade talks and Brexit negotiations evolve. Market volatility (VIX) hit levels above 20 but retreated to 16 as optimism about a potential trade deal rose towards the end of the week. Increased prospects of a limited U.S.-China trade deal underpinned the risk-on mood, with equity indices rallying, led by cyclicals, while safe-haven assets declined.
  • Despite the trade talks and higher chances of a Brexit deal, risky assets got an additional boost from upbeat economic data today. The US. Michigan consumer confidence index surprisingly recovered in September (96, consensus 92, previous 93.2), suggesting that consumption spending positive momentum remains.
  • Sovereign bonds yields soared, recovering from last week’s sharp declines (10Y US +22bps, 10Y GER +15bps). Markets expectations of a 25bp Fed rate cut in October moderated to 65%, while those of an additional cut by year end fell to 25%, down from 65% last Friday. Part of the upward pressure on European yields stemmed from the ECB minutes and press reports confirming the division emerging within the ECB board, particularly on QE. Market expectations of a further ECB rate cut moderated but still remains high (70% probability of 10 bps cut in 2H20). Risk premia fell below 70bps in both Spain (to 67bps) and Portugal (to 64bps), with the latter declining below Spain’s after the election results. Meanwhile Italy’s risk premium remains broadly unchanged around 140 bps, ahead of the deadline to present the 2020 budget.
  • Positive trade deal prospects weighed on safe-haven currencies (DXY index -0.5%, USDJPY -1.5%) The GBP appreciated significantly by 2.6% on increasing hopes of a Brexit-deal (see). Nonetheless, the GBPUSD 1M implied volatility inched up, suggesting that uncertainty remains high in the short term, while the 3M implied volatility moderated.
  • Elsewhere, EM currencies were mixed. Idiosyncratic factors weighed on the Turkish lira, which depreciated (USDTRY -2.9% to 5.9) amid increasing geopolitical tensions in the Middle East (Turkey's 5Y CDS +32bps to 396bps). The Brazilian real also fell sharply this week (USDBRL -1.4%) as markets are pricing in another cut of 75bps by year-end.

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