ITC – Euribor, EGBs, Gilts and OTC Evening Recap: Light at the end of the Tunnel

Main Highlights:
EU Tusk: I’ve received signals from Dublin a deal is possible.
EU’s Barnier given green light to enter “tunnel negotiations”
– Draghi: More fiscal policy needed to help ECB to boost growth

EGBs (with exception of BTPS) trading mixed into European close with short-end seeing a late squeeze higher while long-end remained weighed by optimism on both US/China trade talks and possibility of a Brexit deal. German 10Y yield is 2.7bp higher at -0.442% while the 2Y/30Y spread has steepened by 7bps.

The morning was dominated by optimism on a possible Brexit deal as UK’s Barclay and EU’s Barnier had “constructive” meeting earlier and then later that the EU27 gave the “green light“ for Barnier to  enter “tunnel negotiations”. This gave the initial impression that there was some light at end of a very long tunnel and a deal could be agreed by the EU summit next week. This is a far away from the blame game seen in the middle of the week. Day has been dotted with comments from ECB Draghi & Villeroy and a Reuters ECB story as well.

In a speech in Milan, Draghi talk of there being more fiscal policy to help the ECB to boost growth in the European economy. Villeroy also called more support from the fiscal side and added that the ECB must maintain accommodative monetary policy in face of slowdown and low inflation. While a Reuters ECB sources story talked of possibly adjusting parameters of the capital key rather than changing the issuer limits should the need arise.

The Reuters story helped the 10Y Bund/BTP spread narrow as much as 6bp at one point as any change could lead to more BTPs being bought before fading later in the day to close at 138.5bp, 4bp tighter on the day. BTPS were the best performing of the EGBs as 3Y, 7Y, 20Y & 30Y auction saw good demand overall and the curve is bull steepening slightly.

Markets would faded some of this optimism in early afternoon as political journalists reported about no new firms details being proposed by the UK and that some big concession must have been made to re-start the negotiations which could make it difficult for any deal agreed to get approval in the UK parliament. Talks are expected to continue over the weekend and details at this point are sketchy but reports talk of a re-hash of Theresa May’s customs partnership which Johnson did not like.

A tweet from President Trump (Good things happening), comments from PM Johnson (good conversation with Irish PM) that hinted at a compromise, better than expected US university of Michigan sentiment and rumors that both DUP and ERG group are willing to look at the compromise then added to renewed optimism in US/China trade talks, Brexit and the US economy respectively which pushed Gilts & Tsys to fresh lows and knocked back EGBs (long-end) towards the bottom of the days range. Short-end of EGBs found a small bid at the end of day though following Fed announcement on US T-bill purchases and helped steepen the curve.

Gilts took a very hard hit along with the short-sterling strip on the back of the Brexit optimism. 10y yield jumped 13bp higher at one point before fading a little to settle at 0.715%, up 12.7bp on the day. 10Y yield has risen 25.5bps in last 2-days alone. The Belly of the curve lead the sell-off today which helped 2Y/10Y steepen by 4bp and 10Y/30Y flatten by 3.3bp. Short Sterling strip has sold off 5 to 19 ticks in very high volumes, with the strip steeper as Blues come under most selling pressure in the end.


Couple of options block trades:

– TYX9 131+ Call v TYZ9 130-19+ 26 delta bought @ ’15 x 10,000 & UXZ9 162/161 Put 2×1 sold @ 1’41 x 5000 (20.33ET/02.33BST and 22.45CT/04.45BST)

FVX9 119.25/118.75 1×1.25 ppr sells 40k @ 5.25 on block

Small OAT fut #block: 928 OATZ9 @ 169.03 at 1129BST — looks bought

Eurex Basis report: Some good flows in last hour or so, mainly in OATs with one vs RAGB:

E100mn of FRTR 0 1/2 05/25/29 @ 106.9467 against 670 OATZ9 @ 169.25 — 94k/01 0957BST

E125mn of RAGB 0 1/2 02/20/29 @ 106.96 against 817 OATZ9 @ 169.06 — 114k/01 1034BST

E100mn of FRTR 0 1/2 05/25/29 @ 106.803 against 670 OATZ9 @ 169.06 — 94k/01 1047BST

E240mn of FRTR 0 11/25/29 @ 101.6691 against 1643 OATZ9 @ 169.08 — 243k/01 1056BST

E145mn of FRTR 2 1/2 05/25/30 @ 128.2989 against 1191 OATZ9 @ 169.08 — 139k/01 1106BST

EUR/GBP OIS closing Run:


Stress Indicators

European Close


-UK PM Johnson: Had a good conversation with Irish pm yesterday; doesn’t mean it’s a done deal; working hard to get a deal; if we can’t do a deal. We need to be ready to come out without a deal; best thing we can do is let the negotiators get on with it; under no circumstances will we see anything that damages the ability of the whole of the UK to take advantage of Brexit; asked whether NI will leave customs union, says it would be wrong to give a running commentary

-@PippaCrerar: Brussels sources still very, very cautious about prospect of any breakthrough – would require U.K. to move a loooong way and not sure that’s possible

-EU Spox: Barnier had constructive meeting with Barclay; we are working towards a deal

-EU’s Barnier: Keep calm, we had a constructive meeting with Barnier; Brexit requires vigilance & determination

-@BBCkatyaadler: EU diplomats also sceptical Boris Johnson would want to be seen to be ‘conceding’ to EU ahead of election, with Brexit Party breathing down his neck. EU fear is the PM might enter intensive negotiations, get a concession from EU and then pull out…That said, EU insiders remark that Boris Johnson’s style is at least clearer than that of predecessor TMay who kept changing position. First declaring UK would have distant relationship to EU, then favouring a customsunion. Difficult to negotiate with moving target

-@PolhomeEditor: One government official said: “This morning’s newspaper coverage felt a little too optimistic. There is a very long way to go.”

-@DanielBoffey: Michel Barnier has got green light from the EU27 for there to be tunnel negotiations

-@adamparsons: More from EU source inside the meeting: “Talks are now deepening based on EU positions, to see if there are new areas. In-depth and serious dialogue. Realistic expectations, there is nothing done yet”

-@pmdfoster: Before we ice the champers, am hearing notes of caution. So definitely a ‘negotiation’…but at this point somewhat exploratory. Understand @SteveBarclay didn’t bring hard details to meet with @MichelBarnier today

-@PeterMueller9: UK and EU want to work on some sort of „customs partnership“ for NI I hear from the ambassadors meeting. Apparently a text should be finalized even before next weeks summit

-EC statement on today’s meeting between Barnier & Barclay

-EU Sources: EU’s Barnier told the EU-27 member states that the UK has accepted that a solution to replace the backstop can’t erect a customs border on the Island of Ireland; EU diplomats said possible solution would keep N Ireland in the UK customs union, but at the same time preserve the unity of customs & regulatory checks on the Irish Sea

-@JamesCrisp6: And one EU diplomat tells me: “So we seem to be going into a tunnel although that would imply a way out. So let’s see. Barnier has been given space to negotiate over the weekend. He will revert to ambassadors pre-summit to discuss the guidance sought from leaders at council.”

-Sources: EU official: UK has not requested a Brexit delay

– @adamparsons: Hold on…EU sources now saying that while we’re entering into a phase of intense negotiations, they don’t – yet – classify it as “a tunnel”

– @Steven_Swinford: The DUP is (not* necessarily opposed to a post-Brexit customs partnership with the EU’Provided it doesn’t mean that NI is excluded from being able to participate in new trade deals we could be supportive’

-Buzzfeed: The Most Pro-Brexit members of PM Johnson party signal they are willing to take a pragmatic look at compromise along the lines suggested today


-ECB’s Draghi: More active fiscal policy in the EZ would make it possible for ECB to adjust our policies more quickly

Sources: ECB has one year of German debt to buy before limits

-ECB’s Villeroy: we must maintain an accommodative monetary policy in the face of slowdown and weak inflation; tells Reuters sept governing council meeting is behind us, the decisions were taken legitimately; we must turn the page and look forward now; it is very desirable that budgetary policy extends monetary support everywhere possible in Europe

-Der Spiegel: German gvt cuts 2020 GDP f/c to 1.1% from 1.5%, 2019 GDP f/c reaffirmed at 0.5%; 2 sources said there’ll be a significant cut to Germany’s 2020 growth f/c

-German Economy Ministry Spokeswoman: Gvt’s latest GDP f/c’s aren’t yet finalised

-Spain to sell 2021, 2024 & 2029 bonds on Thursday

-Fitch: Launch of asset protection scheme in Greece is credit +ve for the countries banks

-ECB’s Kazimir: EZ budget deal on Thursday a disappointment, a mere band aid

North America

-US Sep Import Prices: +0.2% m/m vs flat cons;  y/y vs -2.1% cons

-US Sep Export Prices in-line: -0.2% m/m vs -0.1% cons

-US Oct Uni of Michigan: 96.0  vs 92.0 cons

Fed’s Kashkari: Wage growth remains tepid; there’s more slack in the labour mkt, not time to tap the brakes on the economy; mon pol isn’t the right tool to use to react to the trade war, but it’s the only tool we have; it’s worth analysing control of the yield curve as a potential mon pol tool, similar to Japan; if we miss inflation tgt for 10 years in a row, we’re doing something wrong; wage growth at 3.5-4% would suggest max employment, but wage growth has been falling & labour mkt is showing signs of softening; moment to provide a shock with a 50bps cut has passed, needs to see how the trade dispute is resolved or if it continues; on –ve rate, said never say never but hopes to avoid them; if there was a downturn the first step would be Fed funds cut, then turn to QE; over the long term we still have evidence the economy will grow at ~2% & we’re drifting back to that lvl; on repo rate vol said we don’t exactly know what the demand for reserves are going to be; we have to figure out what’s the right growth rate of our balance sheet that isn’t about stimulating the economy; balance sheet growth shouldn’t be confused with QE, which was designed to move down long term rates; wouldn’t support higher rates without stronger wage growth, even if the unemployment rate drops to 2%; large bal sheet will be around for the foreseeable future

-Fed: begin treasury bond purchases of about $60 bln per month to maintain over time ample reserve balances; purchases will be in addition to its ongoing purchases related to run off of holdings of mortgage backed securities; purchases to continue at least until second quarter of next year; o conduct overnight repo operations at least through january to assure ample reserves even during spikes in demand;  actions are ‘purely technical measures’ and do not represent a change in the stance of monetary policy;  open to adjusting plan as needed

-CAN Sep Net Employment Change: +53.7k vs +10k cons, full time +70k, part time -16.3k

-CAN Sep Unemployment Rate: 5.5% vs 5.7% cons

-CAN Sep Participation Rate in-line: 65.7%


– @realDonaldTrump: Good things are happening at China Trade Talk Meeting. Warmer feelings than in recent past, more like the Old Days. I will be meeting with the Vice Premier today. All would like to see something significant happen!

Steve Herman @W7VOA: Update from @POTUS on trade talks with #China. A partial deal could be announced this afternoon, according to some close to the discussions who have spoken with @VOANews.

-Mexican Pres AMLO: Confident that USMCA deal will be approved; we aren’t seeking any changes to the deal, we’re waiting for others to approve the USMCA

-@EdwardLawrence: Chinese trade sources say China is offering to completely remove the requirement for forced joint ventures by Jan 2020. The Chinese would like to see if further tariffs could be suspended or rolled back. We will see if that is enough for the US Trade Team

-@EdwardLawrence: The Chinese Vice Premier scheduled to meet President Donald Trump in the Oval Office at the White House at 2:45p this afternoon. #China #Trade This would be the first meeting for the Chinese in the Oval Office since the negotiations fell apart last May.

-@kaylatausche: MNUCHIN entering USTR: “Looking forward to another productive day of discussions.” Asked whether an agreement was in place. No response

European Open


-GER Sep CPI (Final): m/m 0.0% in line; y/y 1.2% in line

-GER Sep HICP (Final): m/m -0.1% in line; y/y 0.9% in line

-SPA Sep CPI (Final): y/y 0.1%in line; m/m 0.0% in line

-SPA Sep HICP (Final): 0.4% m/m in-line; y/y 0.2% in line

-Italian Bond Auction: Italy sells total of €6.5b 3yr b/c 1.6x, o/b 1.5c; 7yr b/c 1.44, o/b 4.6c; 20yr b/c 1.8x, o/b 23.5c; 30yr b/c 2.22x, o/b 47.6c


-EU’s Tusk: UK hasn’t come fwd with a realistic & workable proposal; if there’s no proposal by today, will announce that there’s no more chance at summit; have received promising signals from Varadkar after meeting yesterday; even the slightest chance must be used


-Shana/NOIC: Iranian tanker explosion likely caused by missiles

-Iran TV: Explosion has damaged two tanks of NOIC owned Sinopa oil tanker

-NITC: Missiles probably came from Saudi Arabia (later denied although NITC confirms missiles hit tanker)

-IEA Global oil supply fell 1.5m bpd in Sep to 99.3m bpd after attack on Saudi oil sites; Saudi crude supply in Sep plunged 770k bpd to 9.02m bod, lowest since 2011; cut their oil demand growth f/c’s for 2019 to 1m bpd & 2020 by 1.2m bpd citing weaker economic /c’s; non-OPEC supply growth led by the US, Brazil & Norway will rise 1.8-2.2m bpd in 2020; OECD oil stocks +20.8m bbl’s in Aug to 2.974b bbl’s, 43.1m above 5y avg, sees Q4 OECD oil stocks draw likely, even with the swift recovery of Saudi o/p & steady supply from the rest of OPEC


-BoJ’s Kuroda: We have various options to ease mon pol; will carefully weigh costs & benefits of each move; Japans slow progress towards 2% inflation tgt has been due to various factors

-China Securities Regulator: Limits on foreign ownership of futures Co.’s to be scrapped in Jan 1st 2020; will scrap limits on foreign ownership of mutual funds Co.’s on Apr 1st 2020 & scrap limits on foreign ownership of securities firms on Dec 1st 2020