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Risk aversion persisted, but the yen was forced to surrender its gains from earlier, likely because of the rise in global bond yields. The pound, meanwhile, surged higher ahead of and during Davis and Barnier’s press conference on Brexit.

  • U.K. Rightmove HPI m/m: 1.5% vs. 0.8% previous
  • Italian industrial production m/m: -1.9% vs. -0.5% expected, 2.1% previous
  • Italian trade balance: -€0.09B vs. €4.87B expected, €5.52B previous
  • Euro Zone trade balance: €3.3B vs. €22.6B expected, €25.4B previous

Major Events/Reports:

Brexit-related updates

British Brexit Secretary David Davis and Michel Barnier, the E.U. top Brexit negotiator, gave a press conference late into the session.

Barnier was the first to speak and he announced that there has been a “decisive step” because the U.K. and the E.U. have agreed “on a large part of what will make up an international agreement for the ordered withdrawal of the UK.”

However, Barnier did warn that “a decisive step remains a step,” adding that “We are not at the end of the road. a lot of work needs to be done.”

And to drive his point home, he revealed the latest Brexit draft agreement, which happens to be a color-coded version, showing that the U.K. and the E.U. still have some disagreements.

However, a quick read through the provisions that have already been agreed upon reveal two provisions that really stand out.

The first is Article 121, which states that:

“There shall be a transition or implementation period, which shall start on the date of entry into force of this Agreement and end on 31 December 2020.”

The second is Article 124, paragraph 4 on “Specific arrangements relating to the Union’s external action.”

According to this provision:

“Notwithstanding paragraph 3, during the transition period, the United Kingdom may negotiate, sign and ratify international agreements entered into in its own capacity in the areas of exclusive competence of the Union, provided those agreements do not enter into force or apply during the transition period, unless so authorised by the Union.”

In other words, the U.K. can enter into third party deals, so long as they don’t take effect during the transition period.

Davis, for his part, lauded these developments, saying that “The deal we struck today should give us confidence that a good deal for the EU and UK is closer than ever before.”

Gloomy start in Europe

The risk-off vibes from the earlier Asian session apparently carried over into Europe since the major European equity indices were broadly in the red.

Aside from risk sentiment spillover, market analysts also blamed the risk-off vibes on skittishness ahead of the Fed’s expected rate hike, as well as poor results for Micro Focus, a software company based in the U.K., which apparently weighed down on technology shares and soured overall risk sentiment.

  • The pan-European FTSEurofirst 300 was down by 0.71% to 1,467.65
  • Germany’s DAX was down by 0.95% to 12,272.29
  • The blue-chip Euro Stoxx 50 was down by 0.74% to 3,413.50

U.S. equity futures also took hits, which implies that risk aversion will likely carry over into the U.S. session as well.

  • S&P 500 futures were down by 0.51% to 2,742.00
  • Nasdaq futures were down by 1.35% to 6,949.50

Global bond yields rise

Global bond yields were actually on the rise, despite signs of risk-taking in the European equities and U.S. equity futures markets.

European bond yields led the uphill charge. And market analysts say that the surge in European bond yields was due to optimistic comments on inflation from three ECB officials over the weekend.

  • German 10-year bond yield up by 1.93% to 0.578%
  • French 10-year bond yield up by 1.31% to 0.829%
  • U.K. 10-year bond yield up by 3.07% to 1.475%
  • U.S. 10-year bond yield up by 0.71% to 2.868%
  • Canadian 10-year bond yield up by 0.75% to 2.151%

Major Market Mover(s):

GBP

The caught a bid at the start of the session and that bullish pressure didn’t really let up.

There were no apparent catalysts, but market analysts were quick to attribute the pound’s strength on hopes that Barnier and Davis will announce a transition deal. And that does sound plausible because there were already leaks and rumors ahead of the official presser.

And when Barnier and Davis delivered on a transition deal late into the session, the pound  found even more buyers and spurted higher still.

GBP/USD was up by 29 pips (+0.27%) to 106.19, GBP/JPY was up by 172 pips (+1.17%) to 149.16, GBP/CHF was up by 101 pips (+0.76%) to 1.3393

JPY

Risk aversion persisted during the morning London session. However, the yen ended up being the worst-performing currency of the session, likely because yen pairs were taking directional cues from the rise in global bond yields.

USD/JPY was up by 29 pips (+0.28%) to 106.19, CHF/JPY was up by 46 pips (+0.42%) to 111.37, EUR/JPY was up by 54 pips (+0.42%) to 130.47

Watch Out For:

  • 1:40 pm GMT: Atlanta Fed President Raphael Bostic will speak
  • 2:30 pm GMT: CB’s leading Australian index (-0.3% previous)
  • 9:00 pm GMT: Westpac’s New Zealand consumer sentiment (107.4 previous)