Euro makes modest gains
With little data out, or much news to move markets, there was not a lot to move the dial substantially yesterday. The euro gained somewhat, with much of the move coming overnight having done relatively little during the day yesterday, and is back to above $1.1225 to the dollar and to 84.8p to sterling. Sterling also edged up against the dollar, back to above $1.3230. Equities lost ground, both in Europe and the US, while in European bond markets, French yields continued to tick up. There was upward pressure on oil prices yesterday, with Brent moving up to $104/barrel, but prices have eased overnight as President Trump stated the US would not attack Iran again in the coming weeks.
There were opposing moves in the US and Euro Area bond markets. US 10-year yields fell, down 6bps to just over 5.2% while similar term UK yields were up 4bps to 5.48% and bunds were up 2bps to just under 3.5%. There was no respite for French yields, with little sign of any near-term solution to public finance issues, with the 10-year French yield edging up 3bps to just shy of its recent high of 3.9%. Equities lost ground for a second day. The S&P 500 fell 0.5% for the day while the tech-heavy Nasdaq was off 1.2%. In Europe, the continued negative sentiment surrounding France is not helping and the Eurostoxx was down 0.9%.
News of further escalation of the conflict in the Middle East saw oil tick up initially. A barrel of Brent traded up to over $104, up about 4%. Iran has stepped up attacks on oil tankers in the Strait of Hormuz, causing rumours yesterday that the US was weighing more military action against Iran in the coming weeks. President Trump earlier this month said further strikes were ‘possible’; however, as rumours were swirling yesterday, he issued a social media post saying the US ‘will not be attacking Iran prior to the midterm elections’ and that there were ‘productive discussions’ with Iran. It remains to be seen if this will calm markets long-term if Iran and its allies continue to escalate their attacks on shipping and energy infrastructure, but for now it has taken off some pressure, with oil prices easing slightly this morning.
The ECB account of the September meeting showed perhaps a slightly less hawkish view than expected. The decision to hike rates by 25bps had broad support and all members of the Governing Council saw inflation risks as skewed to the upside with inflation set to remain above target for an extended period. However, some members thought the energy shock could prove less persistent than assumed as it was ‘essentially politically driven…that could disappear as quickly as it had appeared’ and that indirect and second-round inflation effects were ‘contained’ or ‘not seen’. They also noted that with the deposit rate at 2.5%, it remained in the range of neutral interest rates. As for forward guidance, members felt that communication should remain neutral and this points to no move at the next meeting in October but that another hike could come in December. However, the situation in France is complicating things further, though French fiscal issues were not mentioned at all at the meeting, though that could change at the upcoming October meeting.
More hawkish rhetoric from members of the Fed. Governor Waller said that additional hikes are likely to be needed to return inflation to the 2% target but said there is flexibility and hikes do not need to be at consecutive meetings. St. Louis Fed President Musalem said rates should rise over the next three quarters and said inflation was elevated and ‘driven by persistent demand pressures and supply shocks’.
On the agenda today, a quiet end to the week on the data front with just the University of Michigan confidence data due, and speakers include the ECB’s Cipollone and Schnabel.