central banks on defensive in run-up to year-end

Macroeconomic environment UK: IHS Markit/CIPS UK Construction PMI declined to 52.9 in August. South Africa: further contraction in GDP in Q2, down by 0.7% qoq and by 2.6% yoy. US:   manufacturing ISM clambered to 61.3 in August, up from 58.1 in July, confirming that US economic activity is solid. Equities Equity markets on the back foot due to concerns over the situation of emerging countries. As regards the Eurostoxx   50, it was mainly the building materials and telecom sectors that underperformed, whereas the property and financial sectors outperformed. Bond markets / Derivatives Another difficult session for core sovereigns, swept away by the selloff experienced by Treasuries after the publication of a better-than-expected manufacturing ISM. Against this backdrop, long-dated papers outperformed. Spreads tightened, in particular for peripheral sovereigns, after Matteo Salvini hinted the 2019 budget overrun would be less than expected. Against swap, the 2-year Schatz shed 1bp and the 10-year Bund 0.5bp, due notably to the significant issuance. As regards volatility, gamma was buoyed by realised volatility, notably for long tenors. Money markets / Central banks Steepening of the Eurodollar strip after the higher-than-expected manufacturing ISM, whereas the Euribor and Short Sterling strips were unchanged. The 3-month euro swap basis stabilised around -13bp. As regards central banks, the Reserve Bank of Australia kept its cash rate on hold at 1.50%, the accompanying statement being dovish. Bank of Canada, which will meet today, is expected to maintain the status quo. In the UK, BOE Carney set to stay to 2020 from PM May. FX After the good manufacturing ISM, the US dollar appreciated against all currencies, especially emerging currencies. Amongst the G10 currencies, it was mainly the commodity currencies (New Zealand and Canadian dollars and Norwegian krone) that corrected. The EUR/USD settled below 1.16, while the GBP/USD tested 1.28. Note the sharp fall of the South African rand after the Q2 contraction of GDP confirmed the country was in recession. Commodities Brent rose as high as $78.3/bbl, whereas gold, silver and platinum were all on the back foot.