Markets
Trading entered calmer waters last Friday after the ECB sent a small shockwave through (currency) markets on Thursday. US CPI figures beat expectations but inflation isn’t really of significance for trading. A slew of ECB speeches showed a clear and growing divide within the Governing Council (Lane and Villeroy on the dovish side vs. the more hawkish Vasliauskas and Schnabel & Weidmann who spoke earlier). This is an unpleasant development for consensus-striving Lagarde. The ECB president over the weekend sided more to the dovish spectrum, saying the euro appreciation has partly offset the positive effect from the stimulus. She added that the ECB stands ready to adjust its tools if needed. Stock markets traded choppy near opening levels. WS closed mixed. The German Bund outperformed on core bond markets in a catch-up move with USTs the day before. German yields fell 2.6 bps (2-yr) to 4.8 bps (10-yr). Peripheral spreads widened up to 3 bps (Greece). The US yield curve bull flattened with the belly outperforming. Yields changed -1.1 bps (2-yr) over -1.9 bps (7-yr) to -1.5 bps (20-yr). EUR/USD was on track for a nice gain and settled at 1.1846 eventually (still up from 1.1815). DXY held north of 93.2. USD/JPY closed almost unchanged (106.16). Sterling selling eased after Thursday’s violent move. EUR/GBP still rose though, from 0.923 to 0.926.
Asian markets trade in positive territory this morning, despite a record daily rise in coronavirus cases (see headline below). Optimism about a vaccine at year-end in lack of other news supports overall sentiment. In Japan all eyes are at the vote for the Democratic Party’s new leader. Suga is touted as Abe’s follow-up which would mean a status quo in fiscal and monetary policy. The yen trades stable. The Kiwi dollar (NZD/USD 0.67) outperforms this morning after plans for lifting the Auckland lockdown and ignoring shocker PMIs (cf. infra). Other dollar pairs are trading fairly quiet. EUR/USD hovers near the 1.185 pivot, USD/CNY stabilizes around 6.83. Core bonds trade muted.
We’ll skip today’s irrelevant economic calendar right away and focus on the first Fed policy meeting (Wednesday) since the strategic review instead. The new policy forecasts will probably be overshadowed by any (hints of) additional forward guidance. That could come in the form of specific targets on its dual (inflation and employment) objectives. However, it’s likely that the Fed wants to see how things evolve first before burning up this powerful policy tool, especially with rates already at historically depressed levels. We expect muted trading in the run-up to the Fed. The dollar could remain in the defensive, also from the risk sentiment perspective. Core bond yields have their upward potential capped, especially in the US. In the UK, PM Johnson will send his controversial proposals to Parliament this week (could be as soon as today). If approved, they risk triggering legal action from the EU and all but clear the way towards a chaotic Brexit. Sterling tries to recover from last week’s knock-out blow but we doubt the move will have strong legs given the circumstances.
News Headlines
The daily number of corona-infections hit a record 307k yesterday, according to the World Health organization. Around 5.5k died, taking the total number up to more than 917k. Local hotspots remain India, Brazil and the US. Israel last Friday became the first country to announce a second virus lockdown for at least three weeks stretching over Jewish holiday season.
New Zealand’s equivalent to the services PMI unexpectedly plummeted from 54.4 to 46.9 in August. Details showed that activity/sales and new orders led the decline while the employment gauge now has been running below the 50 boom/bust mark for six straight months. The manufacturing gauge, printed last Friday, also suffered a steep drop: from 59 to 50.7. New Zealand’s largest city, Auckland, is in lockdown since August 23. The kiwi dollar trades somewhat stronger this morning, but that’s more related to this morning constructive risk environment.
