Market movers today
The main event today is the ECB meeting. Key focus will be on ECB’s assessment of the latest surge in COVID-19 cases, its take on the Eurozone economy of new restrictions and to what extent new stimulus is warranted. We think that the ECB will sound open to do more perhaps in December, without pre-committing as incoming data will give clearer guidance about the appropriateness of another PEPP calibration in December with uncertainties such as Brexit and US election out of the way.
In the US, we get the first estimate of Q3 GDP growth, which is likely to show that growth was around 30% q/q AR after the big setback in Q2.
Focus will continue to be on signals from governments in Europe to impose new restrictions to stem the spread of the COVID-19 virus in the wake of Germany and France’s new restrictions yesterday.
The 60 second overview
Lockdowns. Yesterday Germany and France announced strict nationwide measures to contain the spreading of COVID-19. Both countries will in the coming days implement lockdown of bars, restaurants and what is considered non-essential services while mobility, public gatherings and social contact are heavily restricted. Meanwhile most businesses and factories are allowed to operate and schools will remain open in both countries. This is important as it marks a contrast to the more Draconian lockdowns in March. Hence, the economic impact looks set to be smaller this time. The lockdown measures are initially set for a one month duration.
Equities. On the back of worsening COVID-19 numbers and the announcement of new containment measures equities have sold off sharply across markets and sectors. Yesterday DAX, S&P and Nasdaq were down a notable 4.2%, 3.5% and 3.7%, respectively. This morning the big Asian indices have followed suit. On a positive note, US equity futures have rebounded since US close and are up around 1% at the time of writing.
Bank of Japan. As expected, the Bank of Japan kept its QQE with yield curve control policy unchanged at a two-day meeting ending this morning. There were no changes to the Special Program to Support Financing aimed at easing corporate funding strains either. The BoJ has updated its outlook for the economy and cut both the forecast for GDP and inflation, now expecting -5.5% growth in the fiscal year ending in March 2021 and -0.6% in core inflation.
Brexit. According to inside stories the EU and the UK negotiators have made significant progress this week raising hopes that a deal can be reached early November. The talks will continue in Brussels today. Our base case remains a deal but we emphasise that we have yet to see the white smoke.
FI. On a bad day for risk, core and semi-core EGB rates ended marginally lower by 0.5 to 1bp – and as such did not provide the traditional hedge against a risk-off mode, which generally has been a phenomenon in this month. Bunds stand at -62.9bp. At the same time, the periphery underperformed markedly and it was again the BTPs (and Greece) that led the underperformance, albeit the peripheral spreads to Bunds are around worrying levels for the ECB.
FX. We continue to see reflationary headwinds on the back of the second wave of the coronavirus pandemic and ensuing lockdowns in Europe. This is weighing on the SEK in the near term and similarly for the NOK, which yesterday erased gains from earlier in the week.
Credit. Risk-off sentiment hit credit markets yesterday after a period where cash bonds remained relatively resilient. iTraxx Xover and Main were marked 30bp and 6bp wider, respectively. Cash HY went 16bp wider and cash IG is very dependent on maturities, with the front end remaining relatively firm, while the longer maturities struggled more.
