European FX: Negative headlines in Britain aid the sterling fall – Negative headlines concerning the UK arose once again on Thursday, adding pressure to the already weak pound. This time the news came from Scotland, where First Minister Nicola Sturgeon said she will publish a draft Scottish Independence Referendum Bill next week. Reports also said that European Union’s shared budget is emerging as one of the “biggest political obstacles to a Brexit deal”. As a result of these developments, sterling (GDP) dropped to its lowest since 1990. Investor sentiment for sterling is extremely negative, which is reflected in the enormous net-short positioning in the futures market. Moreover, the bias in the option market points to more sterling weakness, while GBP FX option volatility is also increasing. The move looks like a one-way street. However, we would like to stress the risks of a possible recovery in sterling. If economic data surprises on the upside then this could result in speculators taking profit on some of their sterling shorts, pushing the point higher. (Georgette Boele)
Global Macro: China trade growth figures disappoint – On Thursday, September trade data from China came in weaker than expected. Exports contracted by 10% yoy, much sharper than in August (-2.8%). In yuan terms, exports contracted by 5.6% yoy (August: – 5.9% yoy). The drop in exports took place despite a yuan depreciation of around 7%, in real effective terms so far this year. This suggests that external demand is still weak. Still, we should be careful in drawing too strong conclusions, as China’s trade data is notoriously volatile and base effects and distortions also play a role (next to price and currency effects). Meanwhile, merchandise imports fell by 1.9% yoy (August: +1.5% yoy). In yuan terms, imports rose by 2.2% yoy (August: 10.8%). Although import values are also volatile and full of biases, these numbers still point to imports gradually bottoming out, after falling by 14% in 2015. Remember that the latest activity data pointed to stabilisation / improvement. At our recent IMF / IIF visit, we also received confirmation that China is currently less of a global concern than half a year or a year ago. Please also refer to our Washington trip report – Goodbye monetary policy, here comes fiscal policy?, released yesterday (Arjen van Dijkhuizen).
European Markets: Covered Bond Market prints EUR 2.75bn, as market remains favourable – On Thursday, two covered bond issuers came to the market, selling new deals. Both issued 7y euro benchmark deals, which marked a break with previous weeks when most new deals had a 10 year maturity. In the end, Bank of Montreal and Banco de Sabadell raised EUR 2.75bn combined. The sum of the book sizes were EUR 3.85bn, translating in a bid-to-cover ratio of 1.4. Bank of Montreal printed EUR 1.75bn, which was the largest size of a new issue since ABN AMRO sold EUR 2.25bn in April. What is more, the bank paid only a minimal new issue premium, while Banco Sabadell paid a modest one. The fact that demand was still strong suggests that new issue conditions are currently favourable in the European covered bond market. As such, Thursday’s deals are likely to encourage other issuers to enter the market as well. (Joost Beaumont).