Markets
Oil markets show some of the biggest swings today. Brent rose as much as 3.5% before paring gains to 2.7% currently in response to Iran’s missile attack on Israel yesterday. Israeli PM Netanyahu vowed to retaliate and singled out Iran’s oil infrastructure as potential target. As the tit-for-tat strategy intensifies and geopolitical tensions flare up so do fears for a supply disruption. The black gold is currently trading north of $75, compared to $70 less than two days ago. Oil prices are boosting the likes of the Norwegian krone on currency markets. The NOK outperforms G10 peers with EUR/NOK easing to 11.66. First support in the pair approaches around 11.6. On the other side of the FX spectrum is the Japanese yen. JPY slips more than 1%, hurling USD/JPY back above 145. Japan’s freshly appointed prime minister Shigeru Ishiba sat down with Bank of Japan governor Ueda today. Ishiba said in the wake of that meeting that he doesn’t “think that the environment is ready for an additional rate hike”. Whatever little was still priced in for October is now all but gone. Not much happens in between both extremes. EUR/USD is holding a tight sideways 1.105/1.108 range. Some minor dollar strength kicked in after ADP jobs data. The September report topped estimates, coming in at 143k vs 125k expected, following the 103k in August. ADP said “job creation showed a widespread rebound after a five-month slowdown. Only one sector, information, lost jobs. Manufacturing added jobs for the first time since April.” Year-over-year pay gains eased slightly last month, to 4.7%. The small beat is enough to push DXY a tad higher towards 101.47. US Treasuries extended previous losses. The 2-yr yield even printed a small gap following the release of what is usually considered a second tier data point, suggesting perhaps the front end gets a bit crowded with Fed easing bets. Net daily changes vary between 4.5 (2-yr) and 8.2 bps (30-yr). German Bund yields follow closely with gains ranging from +3.5 (2-yr) to +7.5 bps (10-yr). Yesterday’s break of the 10-yr below the August low doesn’t get confirmed today and the failed test of the 2-yr below 2% now triggers some return action higher, even as Latvian governing council member of the ECB Kazaks today greenlighted market expectations for an October cut. The usually hawkish policymaker said “recent data clearly point in the direction of a cut”, adding that “the direction for rates also after October [December] is going to be down”. Both are fully discounted.
News & Views
The Hungarian government debt management agency, AKK, updated this year’s funding plan after the government on Monday reported government deficit and debt levels. AKK won’t change its finance plan because it has a sufficient cash buffer to deal with a higher government cash-flow deficit. That’s mainly because of higher than expected HUF institutional bond (96% of HUF 2481bn target) and T-bill issuance in the first three quarters of the years. By the end of September 2024, 77% of the 2024 annual funding plan (HUF 717bn vs HUF 9277bn target) was met. The average term-to-maturity of central government debt was 5.9y at the end of September, a slight decline from 6y at the end of June but still above the 5.5y benchmark target. Contrary to previous plans, and with particular regard to the 30% FX debt share benchmark, there will be neither an FX issuance in the Chinese market, nor a private placement in 2024, which could result in a lower FX debt ratio at the end of the year. The forint suffers in toughening risk climate with EUR/HUF heading to the key resistance and psychological level of 400.
The BoE’s Financial Policy Committee in its quarterly assessment concludes that risks to UK financial stability are broadly unchanged since the June report. Significant financial market and global vulnerabilities remain. The spike in volatility across global markets early August was short-lived. However, the extent of the moves, in response to relatively limited economic news, illustrates the potential for vulnerabilities. Due to a quick rebound thereafter, valuations of equities in particular are seen as having returned to stretched levels. Markets remain susceptible to a sharp correction, which could affect the cost and availability of credit. With respect to the domestic market, there have been further signs of easing in UK credit conditions, reflecting improvements to the macroeconomic outlook. UK household and corporate borrowers remain resilient to the higher interest rate environment although some highly leveraged firms remain under pressure. The UK banking system is seen as being in a strong position to support households and businesses, even if economic and financial conditions were substantially worse than expected.
Graphs
EUR/PLN nears recent highs as the zloty awaits NBP governor Glapinski’s presser following another status quo decision
German 2-yr yield’s test of the 2% barrier failed, triggering some return action higher in a broader core bond decline today
Brent ($/b) extends recent rally as rising geopolitical tensions poses risks for supply
EuroStoxx 50’s topside test failed, edging back below the 5k barrier
