Markets
Friday’s trading session was driven by stock markets. US Q3 GDP data printed strong (3.5% Q/Qa), but too close to expectations to influence trading. Major European and US indices opened significantly weaker following disappointing earnings by several heavyweight high-tech companies. Typical risk-off correlations played out with core bonds eking out gains and USD/JPY, EUR/USD & EUR/JPY sliding south. All markets bottomed out/topped off intraday as US equity markets eventually found their composure going into the weekend (-1.2% Dow; -2.1% Nasdaq). EUR/USD was exception to rule, rebounding already during European trading after setting an intraday low below 1.1350. The pair eventually closed at 1.1403. US yields lost 3.2 bps (30-yr) to 5.3 bps (5-yr) while the German curve shifted 1.7 bps (2-yr) to 4.6 bps (10-yr) lower. Peripheral yield spreads vs Germany ended unchanged with Spain (+3 bps) and Greece (+11 bps) underperforming.
Asian stock markets trade mixed overnight with China and South Korea underperforming. The US Note future extends gains while main FX markets tread water. BRL outperformed on Friday anticipating the extreme-right Jair Bolsonaro’s presidential election victory which sparks economic reform hopes. Rating agency S&P surprisingly didn’t downgrade the Italian BBB rating during the weekend. They did lower the outlook from stable to negative, suggesting that the axe may nevertheless fall within the next 24 months. The decision could grant BTP’s some short term relief as political leaders and the EU discuss possible changes to next year’s budget. A potential positive impact on the single currency hangs in the balance with another regional election (Hesse) setback for the German CDU and SPD. The federal coalition partners lost significant ground even if the CDU remains the largest party. Some rumours suggest that a growing number of SPD members want to pull the plug on a federal level to limit more electoral fallout.
Today’s eco calendar is rather thin. US PCE deflators for September are less important than usual, because they can be derived from Friday’s Q3 GDP data. Both core and headline readings are expected to stabilize at 2% Y/Y. General risk sentiment will set the tone for trading with some room for rebound in absence of new important earnings releases. Main FI and FX markets could follow a positive risk rebound. The eco calendar heats up later this week with EMU CPI data, EMU Q3 GDP, Chinese PMI’s, US manufacturing ISM, payrolls and more Q3 earnings (eg Facebook, Apple …). Sterling investors particularly eye Thursday’s BoE meeting including a new inflation report. EUR/GBP hovers listless in the high 0.88-area. There is no update on brexit.
News Headlines
With over 55% of the votes won, Jair Bolsonaro defeated Fernando Haddad in the second round of the Brazilian presidential elections. Bolsonaro is praised by markets for his economic agenda, which already triggered a “Bullsonary rally” in Brazilian assets earlier. He aims to revive the economy by tackling corruption, privatizing state-owned companies and reduce taxes.
Germany’s regional elections in Hesse on Sunday were yet another blow to Angela Merkel’s CDU and coalition partner SPD, losing both 11%. The worst results in more than 5 decades come a few weeks ahead of the CDU’s national convention at which Merkel is likely to run again for party leadership.
Rating agency S&P spared Italy on Friday, keeping the country’s rating at BBB but cut the outlook from “stable” to “negative”. The main reason to do so is the government’s fiscal policy that poses a risk to “economic growth prospects, a critical driver of government debt-to-GDP trajectory”.
