Markets
Economic data, including US Q3 growth, jobless claims and economic confidence in the euro zone were a bright spot for markets. Wall Street eked out gains of 0.5-1.6% after the deepest rout in four months. Europe ended a choppy session still in the red, profiting only temporarily from the data and a dovish ECB. Lagarde paved the way for more stimulus in December, when new growth and inflation projections are due. She worried about the escalation of the virus and said the economy is losing faster momentum than expected. The ECB is looking at all policy tools to deliver the additional support. PEPP is the obvious choice but money markets also increased bets on a deposit rate cut, triggering a bull steepening of the German yield curve. Yields dropped 2 bps at the short end. The 10-yr yield (-1 bp) closed at crucial -0.64% support. Peripheral spreads tanked up to 11 bps (Greece) in anticipation of more ECB bond buying. USTs underperformed. US yields rose up to 5.1 bps (10-yr) amid a better bid in (US) risky assets. The euro stayed in the defensive all day with the down move extending after the ECB explicitly stated it will monitor its development in its policy assessment and as increased speculation on a deposit rate cut weighed. EUR/USD finished below important support at 1.1696 at 1.1674. Sterling trading was volatile amid a fragile risk context and headlines suggesting a deal is possible by early November. EUR/GPB closed slightly lower in the 0.903 area.
US big tech earnings lead to a violent after-market sell-off in the US yesterday and pummels current sentiment as well. After resisting sell-pressure in Europe and US the past few days, Asian stocks tumble up to 2.5% with losses building going into the final trading hours. Core bonds are upwardly oriented with the German Bund nearing the previous contract high at 176.4. The dollar trades mixed. The likes of the CAD, AUD and NZD lose marginally while the euro and especially the yen advance to the dollar. USD/JPY once again is close to support at 104.
Today’s economic calendar contains euro zone inflation and Q3 growth. The former is expected to remain negative for a third month straight (headline -0.3% y/y). The ECB president said we could see a positive surprise for Q3 growth. Markets expect a rebound of 9.6% q/q after a -11.8% contraction in Q2. However, she added that due to the rapid escalation of the virus, the current quarter would disappoint. We think markets will indeed focus on the current dynamics rather than historical growth, even if it surprised to the upside. The non-existent market reaction to the French surprise (18.2% q/q growth vs. 15% expected) supports our take. Along with today’s grim mood – futures point to a deep negative European open – we expect the risk-off positioning to resume after a technical US rebound yesterday. The technical picture in stock indices, including EuroStoxx50, is pointing into the same direction. The German 10-yr yield is at the verge of falling below -0.64% support. We hold a more nuanced approach towards the dollar. The poor performance this morning suggests the downside of EUR/USD might be better protected than one could expect. EUR/USD 1.1612 is the next reference to the downside and has to hold going into the weekend.
News Headlines
German Finance Minister Scholz and Economy Minister Altmaier provided details on the €10bn government assistance to mitigate the impact of the November partial shutdown. Under the program, businesses that have to shut down activity will receive 70% of revenue from the same month in 2019. This amount can be raised to 75% for companies with 50 employees or fewer. Scholz indicated that the government could do more if necessary.
A statement after a four-day meeting of the Communist Party Central Committee said that China aims to achieve ‘medium-to-high growth’. Quality of growth rather than the pace will matter, with the focus on supporting domestic demand and further opening the economy over the next five years. Longer-term, China aims to be a global leader in innovation with maximum self-reliance in key technological areas.
