EM CEEMEA CREDIT: South Africa: LM - 10Y yield below 9%

• Following a similar theme to Monday’s session, the USD index is down 0.2% today, extending its grind lower to reach the lowest levels since early July. The index is now within 1% of the multi-year lows as we approach tomorrow’s Fed decision, which reside at 96.38. Continued strong performance for major equity indices and the more activist approach to Fed personnel management from the White House are providing greenback headwinds.
• In slight contrast today, it’s the majors which are outperforming, led by the likes of EUR and JPY. This has prompted a EURUSD (+0.40%) print above 1.18, as the pair narrows the gap to the cycle highs and key resistance at 1.1829. Clearance of this hurdle would confirm a resumption of the primary uptrend and immediately target the Sep 10 2021 high at 1.1851.
• Unsurprisingly, action has been centred around the Japanese yen, with USDJPY trading a 146.70-147.54 range already on Tuesday. The Yen was supported overnight by agricultural minister Koizumi’s intention to run for LDP leader. Finance Minister Kato is set to run his election campaign, providing a more hawkish (with respect to both fiscal and monetary policy) option compared to opinion poll leader Takaichi. USDJPY has subsequently settled back at 147.00 and key short-term support to watch remains at 146.21, the Aug 14 low and a bear trigger.
• In line labour market data from the UK has allowed GBP to continue its ascent against the dollar this morning, following yesterday’s breach of key resistance at 1.3595. The break strengthens bullish conditions and opens 1.3681, the July 4 high.
• It’s worth highlighting that AUDNZD briefly broke to the highest level since 2022 at 1.1191, however, momentum quickly stalled with the cross reversing back to 1.1160. New Zealand GDP is due Thursday local time, shortly before Australian employment data for August.
• Today’s focus will be on US retail sales and Canada CPI data, with US import prices and industrial production also scheduled.

• That is a relatively soft auction of the 4.375% Jan-40 gilt with a 0.9bp tail seeing the LAP (lowest accepted price) come in at 93.090 - below the pre-auction mid-price of 93.144 (a price that was exagerated a little itself by a move higher into the end of the bidding window. Prior to that the prevailing level had been around 93.116.
• Either way this short 15-year auction will be seen as slightly disappointing and the price fell immediately after to 93.051 (before moving back to broadly in line with the auction LAP at writing).
• Gilt futures saw some volatility around the results publication falling from 91.54 to 91.46 but are now trading around 91.52 - only minorly below pre-auction levels.

Prime Minister Sir Keir Starmer remains in a vulnerable position after two weeks of political upheaval that has seen a senior minister, senior aide, and ambassador forced from their positions at the same time as the largest right-wing march in decades, and amid preparations for US President Donald Trump's high-profile state visit on 17-18 Sep. Nevertheless, as Bloomberg noted earlier today, Starmer's position is likely safe for now, given the lack of viable potential replacements as leader of the centre-left Labour Party in the short term. 

• With former DPM Angela Rayner politically wounded, Health Secretary Wes Streeting (seen as a centrist compared to Rayner on the soft left) now becomes an early favourite. However, Labour's majority in his Ilford North constituency is very narrow, and he is not as popular with party members as Rayner.
• Political betting markets continue to show bettors inclined to think that Starmer will be forced from office/resign in 2026. Data from Smarkets shows bettors assigning a 35.2% chance Starmer leaves Downing St. in 2026, up from 18.8% on 27 Aug. The implied probability that Starmer lasts until the (likely) next general election in 2029 or beyond has fallen from 33.6% on 1 Sep to 16.1% presently.
• The policy implications of the situation are mixed. On the one hand, Starmer remaining in office could be seen to lessen the risk of a major shift to the left under a new party leader and PM. On the other hand, with poor opinion polling and increasingly vocal opposition from within his party, Starmer could launch more aggressive shifts in policy (notably with the budget approaching) to try and wrest back the initiative. 

Chart 1. Betting Market Implied Probability of Year Sir Keir Starmer Leaves Office as PM, %

Source: Smarkets