Markets
The dollar’s intraday slide ended after US investors entered dealings. The trade-weighted greenback reached its softest level in more than 2 years’ time with EUR/USD touching the 1.20-mark only the second time since April 2018. There wasn’t much news to guide trading with (US) investors possibly making some last-ditch end-of-month adjustments following the long Thanksgiving weekend. The comeback of the dollar went hand-in-hand with a faint on stock markets. European indices closed ugly, losing more than 1%. US closing marks ranged between flat (Nasdaq) and -0.9% (Dow). US Treasuries went nowhere with daily changes varying between -0.5 bps and +0.2 bps. The belly of the curve underperformed the wings. German Bunds underperformed with yields adding around 1.7 bps across the curve. Core bonds in general tend to show signs of topping off. 10-yr spreads vs Germany ended near unchanged.
The Fed released Chair Powell’s testimony before the Senate Banking Committee. He welcomes the recent vaccine news as positive for the medium term, but warns that “significant challenges and uncertainties remain, including timing, production and distribution and efficacy across different groups.” The US central bank will do everything in its power to strengthen market thinking that its easy monetary policy is here to stay. They already did so by not showing any policy rate hikes in the forecasting horizon and are expected to strengthen forward guidance on asset purchases at the final meeting of the year. In June they said they would run “in coming months”. Dallas Fed Kaplan sent a similar signal, warning for a tough 3 to 6 months ahead before economic growth can accelerate in H2 2021 once vaccines are distributed widely.
Asian risk sentiment is more positive overnight with indices surging by up to 2%. Regional economic data printed stronger than expected manufacturing PMI’s in China (Caixin; 54.9 from 53.6) and South Korea (52.9 from 51.2) and an upward revision to Q3 growth (2.1% Q/Q from 1.9% Q/Q)). Core bonds are going nowhere this morning with the dollar back in the defensive. Brent crude eyes the outcome of the OPEC+ meeting. Will the oil producing countries agree on delaying tapering production cuts beyond the start of the year? Other items on today’s agenda are the OECD growth outlook and the US manufacturing ISM. If PMI’s offer any guidance, ISM’s will remain strong in November, boosted by the removal of election uncertainty and by vaccine breakthroughs. This positivism will outweigh exploding US Covid-curves and the re-introduction of regional restrictive measures. Short term, we assume caution on the new rise in infections to prevail. We therefore don’t expect big market optimism. We expect the dollar weakening trend to remain in place unless we see a significant deterioration in risk sentiment.
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The RBA kept both its policy rate and its three-year yield target unchanged at 0.10% after cutting it last month. Given the outlook, the cash rate probably won’t be raised for at least 3 years. The RBA pays particular interest to the labour market, which need to be significantly tighter to drive wages and return inflation to the 2-3% target. The board will also keep the size of its bond buying programme under review and is prepared to do more if needed.
EMU finance ministers agreed to the creation of a common backstop to the bloc’s Single Resolution Fund (SRF). It entails additional cash from the ESM should the SRF run out of money when ailing lenders in need. The backstop will come into force in 2022, 2 years earlier than planned and is an important step in the bloc’s banking union.
In Germany, opposition MPs are starting to push back against the spending thrift and urge a return to prudency after finance minister Scholz presented a near doubling of the amount of new borrowing for 2021. Scholz injected €1.5tn to cushion the economy and suspended the debt brake, a measure that limits the budget deficit to 0.35% of GDP. The debt brake is projected to be restored in 2022 but many, also coalition party members, think that’s unlikely.
