Market movers today
This week’s highlight is the FOMC meeting on Wednesday, which is the first after the Fed announced its new AIT framework. We expect a change of forward guidance and an increase in QE buying. We think the Fed will recognise the importance of building up credibility right away, especially as inflation expectations remain subdued. See Fed Monitor: Forward guidance linked to inflation outcomes and faster QE buying on the cards, 2 September.
Today, the leadership election in the ruling Japanese Liberal Democratic Party will decide PM Abe’s successor. Cabinet chief secretary and Abe’s right hand Yoshihide Suga looks set for the win and is set to continue Abe’s accommodative economic policy. Suga is the ‘steady hand’ candidate. He has no plans of raising the sales tax further for another 10 years and he supports the Bank of Japan’s aim to achieve the 2% inflation target.
The 60 second overview
Macro. This morning we published our new update on the global economy, The Big Picture: Global recovery on track. The global economy is rebounding fairly strongly from the deep recession in the second quarter, thanks to strong policy support, reopening of economies and second virus waves not having as negative an impact as feared. We have grown more confident in our baseline scenario (raising probability to 60% from 50%) of a strong rebound in Q3 followed by a continued expansion in Q4 and into 2021, albeit at a more moderate pace. In the same vein, the risk of a downside risk scenario has waned in our view (from 35% to 25%) but the risk is still present from new shocks (like Brexit, US/China tensions), stronger virus outbreaks over the winter and inadequate policy support (notably on the US fiscal side). This could turn the ‘pandemic recession’ into a ‘traditional recession’. That said, the unprecedented fiscal and monetary policy support and a fast break-though and rollout of a COVID-19 vaccine leave a chance (15%) of a stronger economic rebound bringing western economies back to pre-crisis levels in mid-2021.
Trade. In the midst of the chaotic Brexit negotiations, the UK struck its first trade deal after leaving the EU. The UK trade department says the new deal with Japan means 99% of British exports will be tariff-free and could increase trade by GBP15.2bn (USD19.4 billion) in the long run. The negotiations have likely been sped along as Japan wanted an agreement before the change in government this week.
Equities. Asian stock markets trade in the plus this morning after news that AstraZeneca, the British COVID-19 vaccine candidate, got the green light to resume trials on Saturday after late-stage trials of the vaccine were suspended earlier last week. MSCI’s broadest index of Asia-Pacific shares outside Japan is up 0.5%.
FI. The positive sentiment in the global bond markets continued on Friday given a modest decline in the 10Y German and 10Y US government bond yields. During the weekend there has been a string of speeches from ECB officials (Lagarde, Rehn and De Guindos), where the focus was on the recent strengthening of the EUR and the impact on inflation. Here the ECB is trying to give a balanced view between the concern of a more permanent strengthening of EUR and the negative impact from inflation.
FX. Friday was rather uneventful although Brexit fears continued to weigh on GBP with EUR/GBP moving as high as 0.928 on Friday. Brexit fears, as well as the recent tech sell-off and ECB’s FX comments have so far not had a long-lasting impact on EUR/USD, which continues to trade above 1.18.
Credit. In credit markets, iTraxx Xover ended Friday 10bp wider, while Main only widened 1bp.
