Update on contagion

Macroeconomic environment France: September manufacturing PMI confirmed at 52.5 (final estimate), down from 53.5 in August, marking a slowdown in activity in this sector, due notably to the trade tensions worldwide and to the global slowdown of the auto sector. Eurozone: much the same trend in evidence, with furthermore a downward revision of the final estimate to 53.2 (from 53.3), which constitutes a 2-year low. After a 3-month pause at 8.2%, the unemployment rate resumed its descent in August, down to 8.1%. UK: pleasant surprise, as the PMI improved to 53.8 in September (from 53 in August). US : slight disappointment concerning the manufacturing ISM, which weakened to 59.8 (from 61.3 in August). Note that the prices paid component fell sharply (down 5.2 points to 66.9). Equities European equities closed higher on Monday, the Stoxx  600 adding 0.2%, buoyed by the technology sector (+1.61%) and energy sector (+0.81%).Much the same for US equities, with the S&P 500 inching higher after the agreement reached over NAFTA’s successor. Japanese stock exchange at a 20-year high, with the Nikkei 225 up 0.52% at the close of trade in Europe. Bond markets / Derivatives Risk-off session for Eurozone sovereigns, with investors waiting with bated breath for developments concerning the Italian budget. Peripheral spreads widened, as did swap spreads. The BTP-Bund is at 295 bp this morning . As regards volatility, the final quarter has opened on an outperformance by gamma, buoyed in the main by realized volatility. Even so, short-dated volatilities remain cheap. Money markets / Central banks Despite disappointing inflation data at the end of last week, Eurozone inflation expectations are bearing up. The 1Y1Y Eonia is still trading around its year’s highs (therefore above its January levels). The Eurodollar strip is steepening, with contracts appreciating all the way out to June 2022. The Euribor strip flattened, with the Nov 2018-Jun 2019 contracts underperforming longer dated contracts. Australia : RBA leaves its cash rate at 1.5% as expected FX Increase in spot rate s for the Canadian dollar (+0.74 %) and Brazilian real (+0.78 % at close of trade in Europe) after the agreement reached over NAFTA’s successor. The Japanese yen and euro both lost 0.2%. See our FX daily Commodities Copper declined on the back of disappointing manufacturing data out of China, with the official manufacturing PMI index coming in at 50.8, down from 51.3 in August. This serves as a further sign of weaker demand due to the US-China trade war.