Markets
After the corrections that developed in bonds, FX and equities earlier last week, on Friday, the focus for trading turned to the US payrolls report. The US job report can be labeled as solid even as employment is still far away from the pre-corona levels. August US job growth slowed from 1734k in July to 1371K in August but was still slightly above consensus (1350k). Monthly job creation was also supported as the government hired 240k of temporary census workers. The unemployment rate declined more than expected from 10.2% to 8.4%. This better than expected unemployment rate was the eye-catcher for trading. On the bond markets, the payrolls triggered quite an impressive reversal on the (corrective) flattening that developed earlier last week. The move started in a rather guarded fashion, but gained traction later. At the end of the day, the US yields curve showed an impressive bear steepening with the 2-y yield rising 1.7 bps and the 30-y rising up to 11 bps! In this respect, the move was quite forceful, maybe a bit outsized given the content of the payrolls report. Some investor repositioning ahead of the long weekend might have been in play. Investors preparing for this week’s supply is another potential explanation for the rather sharp move. German yields to some extent followed the move in the US. Yields rose between 0.3 bp (2-y) and 2.3bp 30-y. (US) equities continued to trade volatile after the sharp correction on Thursday. The major indices still closed with losses between 0.56% (Dow) up to 1.27% (Nasdaq), but finished the session well off the intraday lows touched early in the session.
On the FX markets, the reaction of the dollar was a bit out of line with the developments on the bond markets. The dollar temporarily gained ground immediately after the US payrolls release. EUR/USD dropped from the 1.1850 area to the 1.1785 area. However, the US currency couldn’t hold on to its gains, despite a sharp rise in (real) US yields. EUR/USD closed at 1.1838 (from 1.1852 on Thursday). The trade-weighted dollar (DXY) also finished the day little changed at 92.72. USD/JPY closed marginally higher at 106.24. EUR/GBP dropped to the 0.89 intraday. However, this rebound of sterling had no strong legs. BoE‘s Saunders gave quite some dovish comments as he indicated that additional monetary stimulus will likely be needed. EUR/GBP closed at 0.8915 • Asian equities are mostly trading with modest losses this morning, with Korea and Australia the exception to the rule. The dollar is gaining a few ticks (DXY 92.90; EUR/USD 1.1830 area). The yuan is holding rather strong (USD/CNY 6.8320 area) even as US-China trade tensions continue to linger. Headlines on UK setting a new deadline for EU-UK trade deal (Oct 15) and preparing legislation undermining the divorce deal are raising Brexit tensions and weighing on sterling. EUR/GBP is changing hands in the 0.8950 area. Later today, the eco calendar is thin and US markets are closed for the Labour Day holiday. Later this week, the ECB (Thursday) and the Bank of Canada (Wednesday) will hold a regular policy meeting. On Friday, the US CPI will be published. Bond investors will keep a close eye at US bond auction including the sale of 35 bln of 10-y notes (Wed) and 23 bln of 30-y notes (Thursday).
News Headlines
The UK is preparing new legislation that will undermine key parts of the Brexit withdrawal agreement. The UK’s “internal market bill” is designed to secure the “seamless functioning” of trade within the UK, including Northern Ireland after it leaves the EU’s single market end of this year. But some clauses will override parts of the NI protocol that was agreed in October 2019. The bill risks poisoning the already difficult trade talks between the EU and UK.
Saudi Arabia cut oil pricing for October for Asian and US buyers. It is the second consecutive month of price reductions and a sign the world’s biggest exporter sees fuel demand wavering while countries grapple with coronavirus flare-ups across the globe. Brent oil (-1.15%) temporarily fell below $42/b this morning.
