Markets
Markets concluded a volatile week in a calmer, but constructive fashion last Friday. Thursday’s profit taking on the vaccine rally didn’t continue. European equities gained less than 0.5%. US equities were better bid, with the Dow (1.4%) and S&P (1.3%) outperforming the Nasdaq (1%). Markets assumed that the roll-out of a vaccine combined with fiscal and persistent monetary aid will support a cyclical rebound next year. Consumer confidence of the U. of Michigan unexpectedly declined due to uncertainty on the new virus spike and on the outcome of the US election, but had no lasting impact on trading. US yields even rose up to 1.5 bps (5 & 10-y). Bunds outperformed with yields declining up to 1.6 bp (30-y). A better sentiment guided the dollar lower intraday. The TW-dollar (DXY) closed at 92.75. EUR/USD finished at 1.1834. Thursday’s sterling decline halted as investors awaited next moves in the Brexit sage as the November 15 ‘deadline’ kicked in. EUR/GBP closed marginally lower at 0.8972.
Asian markets are supported by multiple positive headlines this morning. The China economic recovery remains on track. October production (6.9% Y/Y) and investments (1.8% Y/Y) printed stronger than expected. Retail sales also rebounded (4.3% Y/Y from 3.3%) but at a slower pace. Japan Q3 GPD also exceeded expectations. The data reinforced investors’ hope on a cyclical rebound. Asian Pacific nations signing an agreement on the Regional Comprehensive Economic Partnership and the ‘Biden administration’ indicating it wants to avoid a national lockdown despite current spike in virus cases supported broader market sentiment. Regional indices are rising up to 2.0% (Japan). The yuan is returning to recent peak levels against the dollar (USD/CNY 6.5775 area). The dollar is in the defensive overall; USD/JPY drifted back to the mid 104 area; EUR/USD is gaining a few ticks (1.1860 area).
Later today, the eco calendar is rather thin. The US Empire manufacturing survey is the exception to the rule. Several central bank members including ECB’s Lagarde, ECB’s Mersch and Guindos and Fed’s Clarida will speak. It looks that the week will start with positive risk sentiment also in Europe and the US. However, of late the impact of such a risk-on on bonds and/or the dollar sometimes wasn’t that straightforward. Bond investors still expect monetary policy support for quite some time even if the prospect on a vaccine improves the outlook further out next year. The 0.95/0.97% are looks a strong resistance ST for US yields. -0.45/-0.50% plays a similar role for the German 10-y yield. Markets positioning for a cycle rebound also supports some industrial commodities like copper and aluminum. EUR/USD is again nearing the 1.1881/1.1920 resistance. The EUR/USD downside looks quite well protected. However, recent rise in US (real) yields still might give the US currency some reprieve ST. In this context, the MT 1.16/1.12 consolidation pattern since end July probably won’t give away without a clear trigger. The Brexit negotiations also will continue beyond the informal deadline of 15 November. The Irish Foreign Minister called this week ‘move week’ but UK sources suggest talks can continue for even longer. Hope on a deal one way or another might protect the downside in sterling short-term. However, the EUR/GBP 0.8865 area might prove a strong support, even in case of good news. The UK eco story might cap a sustained sterling rebound longer-term.
News Headlines
The Association of South-East Asian Nations (10 countries), Australia, New Zealand, Japan, South Korea and China signed the world’s largest plurilateral trade deal, RCEP (Regional Comprehensive Economic Partnership). India dropped out during negotiations. The population covering RCEP represents around 1/3rd of global GDP (2019). Reduction of tariffs and rules should stabilize regional supply chains. China this year became the largest trading partner of several regional countries as the COVID-pandemic and US-China trade war triggered a recalibration.
Japanese GDP rebounded more than expected in Q3 (5% Q/Q), following three consecutive quarterly contractions due to first a consumption-tax hike and next the Covid-lockdowns. Spending, exports and business sentiment improved, but firms remain hesitant to invest. Government spending remains one of the biggest GDP-drivers with Japanese PM Suga in the meantime calling for yet another fiscal stimulus package.
