Market movers today
It is a very quiet day on the data release front. Brexit will continue to catch the limelight with the Boris Johnson government trying to push through his Brexit law in the House of Commons in only three days. The big moment is around 20:00 CEST when the MPs vote on the general principle of the bill followed by a vote on the timetable for the rest of the bill. The bill is expected to survive the former but may lose the latter, which would make it very difficult for Johnson to leave the EU by 31 October. We still need to monitor whether there may be support for tweaking the bill in such a way that there is no longer support for passing the overall bill. In particular focus is on (1) a confirmatory referendum and (2) a permanent customs union.
The Hungarian central bank (MNB) is set to announce its monetary policy rate decision today. In line with Bloomberg and Reuters consensus, we expect the policy rate to stay unchanged at 0.90%. The MNB’s tone is likely to continue to be dovish on decelerating inflation but the recent Brexit deal has supported central and eastern European currencies, including the HUF. Thus, there is less pressure on consumer prices from HUF devaluation in the future.
Selected market news
Trade talk optimism continues to lift market sentiment and was further fuelled yesterday by positive comments from Donald Trump that talks over an initial trade deal are progressing. Based on the latest developments, we now set the probability of a deal at 50% from previously 40% (see China Weekly Letter: US compromise raises chances of a real trade deal , 18 October). European equity markets advanced, as bank shares climbed with rising bond yields. The S&P 500 index surpassed the 3000 level and the risk-on mode seems to continue today with Asian equities and US index futures in the green.
A solution to the Brexit drama remains elusive, as PM Johnson struggles to get his deal over the finish line. The Withdrawal Agreement Bill was published yesterday and the focus in the upcoming debate (despite possible amendments on confirmatory referendum and/or customs union) seems to be on the MPs’ power to ask for an extension of the transition period (clause 30), the MPs’ power over the negotiations with the EU (clause 31) and workers’ rights (clause 34). A key element is that some MPs fear that they do not have enough power to avoid a no-deal Brexit by the end of the transition if no permanent deal is reached.
European government bonds remained under pressure as the market concluded that the risk of a hard Brexit is now very small. 10Y Bund yields jumped 4bp to the highest level since July. Italian bonds underperformed after reports of renewed tensions within the governing coalition over amendments to the 2020 budget pushed for by the Five Star Movement. Last week the government submitted its budget proposal to Brussels envisioning a budget deficit of 2.2% of GDP for 2020 and a further deterioration in the structural deficit. That would require flexibility from the EU Commission, which is reportedly seeking some clarifications on the budget details. However, we still see the probability of another budget stand-off as low at the current stage.
