Markets
The start of the month marked a fresh attempt to awaken reflationary spirits. Without much ado, European/US stock markets rallied over 1% while core bonds and the dollar sold off. Higher than usual traded volumes suggest that moves shouldn’t be judged as one-offs. US House Speaker Pelosi (Dem) and Senate Majority Leader McConnell are back on speaking terms and seem willing to speed up the approval of additional fiscal stimulus before the end of the year. The leading US immunologist, Fauci, already warned that the current US Covid-outbreak is worse than in spring and summer. A bipartisan $908bn proposal which aims at providing emergency aid to the most vulnerable people/businesses until the end of March is currently under discussion among US lawmakers.
US traders kickstarted yesterday’s action after they entered dealings. Core bonds fainted with both real rates and inflation expectations on the rise. Several US gauges for inflation expectations reached their highest levels since the first half of 2019. US Treasuries underperformed German Bunds. The US yield curve bear steepened with yields rising by 1.9 bps (2-yr) to 10.1 bps (30-yr). The German yield curve moved in similar fashion with yields adding 2.4 bps (2-yr) to 4.9 bps (30-yr). 10-yr yield spreads vs Germany narrowed by up to 3 bps for Greece. The big moves on bond markets turned out to be the straw that broke the dollar’s back. The US currency proved to be very sensitive to diverging inflation expectations between the US and Europe/the rest of the world while he didn’t completely adapt to this summer’s crash in US real yields. The latter could turn out to be partly permanent damage. Anyway, the trade weighted dollar waved goodbye to the September low (91.75) and currently changes hands in the low 91 area.EUR/USD treated the 1.2011 September top in the same way, with levels around 1.2070 currently on the charts.The final stop before the EUR/USD 1.2555 2018 top stands around 1.2102 (76% retracement 2018-2020 decline)/1.2155 (previous neckline double top formation). USD/JPY is the exception to the rule, standing its ground near 104.50. EUR/USD’s rally pushed EUR/GBP higher as well with the pair back struggling to overtake the psychological 0.90 barrier. The drums from brexit talks suggest that negotiators hope to land a trade deal by the end of the week.
Asian risk sentiment is slightly less ebullient this morning, but core bonds and the dollar fail to retake some of the ground lost yesterday. Today’s eco calendar contains US ADP employment change and the Fed’s Beige Book, but we don’t expect them to alter current trends. Core bonds and the dollar are bound to remain in the defensive.
News Headlines
RBA chair Lowe said the Australian economy has turned a corner and sees possible “upside surprises” to growth and employment if the pandemic remains contained. He pointed at surging consumer confidence and record-low borrowing costs. Growth rebounded a more-than-expected 3.3% q/q in Q3 thanks to a bounce-back in household spending (7.9% q/q), data showed today. His comments came after a rather dovish RBA policy meeting yesterday.
President-elect Biden said he would not immediately abandon the Phase 1 trade deal that president Trump reached with China earlier this year.That also means he won’t touch the current import tariffs in place in the short term. Biden first wants to conduct a full review of the US’s trade policy towards China and consult with key allies.
The Canadian dollar is at a key juncture vs. the USD, trading close to important support levels at 1.294 currently. The USD/CAD weakening not only comes on the back of a soft USD, but also on a strengthening loonie a.o. thanks to rising oil prices. Meanwhile, Q3 GDP data yesterday revealed a 40.5% q/q annualized surge after the 38.1% decline in Q2. Household consumption and business capital formation soared a whopping 62.8% and 82.4% respectively.
