Market Talk – October 7, 2016

Asian markets were marginally better on the back of oil but were awaiting the all important US jobs report after a sleepy opening until the FX market woke everyone up. A “fat-finger trade” as many were reporting it (implying a trader input the wrong price and/or quantity) saw GBP trade down to 1.1378 in seconds only to recover to 1.1900 briefly then concentrate back at 1.2400. As far as we know all trades were honoured yet the speculation continues. Stocks really were unsure what to do and so continued to consolidate just under previous close. In late US trading the HK futures have recovered the earlier losses whilst the Nikkei continues the weaker theme as the JPY approaches the 103 level.

Europe opened weaker following lots of speculation around the GBP move but FTSE did play that opposite trade moving higher from the open. Peripheral markets continue to wobble with many still under pressure. DAX and CAC were around 0.5% lower whilst Spain’s IBEX lost 1.5%. There are many rumours flying around the City (London) and all negative. The latest are anything from its all the governments fault, BREXIT will lead to recession, the Bank of England should lose its independence and report directly to Downing Street to – we should vote again. Europe still under pressure with speculation Deutsche will sell off assets and is happy to look at a bid for any of its assets! All this uncertainty pushes more money into the US Dollar trading above 97 earlier in the week.

US NFP came in a little under expectation at +157k (+176k expected) with the unemployment rate ticked-up to 5%. Stocks were hit upon the news but as the day wore on so the decline was clawed back and by the close we are back close to unchanged. Much speculation will be in the weekend press surrounding the GBP, rates, the dollar index (DXY), oil and Mondays second Presidential debate. Whenever there is uncertainty people steer for safety which could point towards the US Dollar be that Treasuries and/or equities.

US 10’s closed marginally higher (price) after the initial sell-off after the data. 10’s closed 1.72% (-2bp) with 2’s closing 0.83% which puts 2/10 curve at +89bp. The German 10yr Bund closed +0.02% (+4bp) closing the US/German spread at +170bp. Italy 10’s closed 1.38% (+4bp), Greece 8.15% (+4bp), Turkey 9.45%, Portugal 3.55% (+7bp) and UK Gilts closed +0.97% (+10bp).

Since the speculation that the UK will borrow to grow following BREXIT the Gilt market has been on the slide. Given at one point today the currency dropped 6% it should be no surprise the demand for 10yr Gilts at sub 1% should be extremely limited, especially for foreign investors.