Markets
Catalysts that supported Asian dealings yesterday remained the driver for European and US markets yesterday in absence of any other guidance. Optimism about a Covid-19 vaccine and some M&A activity suggesting the economy is picking up again pushed European stocks higher at the opening but momentum was lost soon. That wasn’t the case on Wall Street though. US stocks rose up to 1.87% (Nasdaq). Core bond yields fluctuated within a narrow -2/+2 bps trading range to close almost flat eventually. USTs marginally underperformed. Peripheral spreads to Germany’s 10y mostly narrowed. Italy (+4 bps) lagged peers. The dollar struggled. EUR/USD finished at 1.1866, up from 1.1846. The Japanese yen advanced, especially to the USD after Abe’s right-hand Suga was elected as leader of the ruling LDP – and thus as PM – by a landslide. USD/JPY fell from 106.16 to 105.73. Sterling tried to recoup some of the steep losses last week but hit resistance at 0.92 EUR/GBP soon. PM Johnson’s controversial Brexit bill cleared a first hurdle of the parliamentary process in the House of Commons yesterday with a comfortable 77-vote majority. The direct impact on the pound was limited however. EUR/GBP ended at 0.923 vs. 0.926 on Friday.
Asian-Pacific markets trade rather muted despite a strong close on WS yesterday. Most indices gain 0.2 to 0.5%, with sentiment supported by stronger than expected Chinese data (see below). The PBOC injected a net 400bn yuan into the banking system, the biggest of its kinds since 2018, to address a liquidity shortage. The central bank signaled it would only pour just enough cash to support the system without flooding markets with liquidity. The Chinese yuan jumped to the highest level since May 2019. USD/CNY – currently at 6.78 – breaks important support at 6.79 (76.4% fibo retracement from March ’19 low to Sep ’19 high). That’s also due to dollar weakness. EUR/USD nears 1.19. USD/JPY loses a few ticks (105.64). Core bonds tread water.
Today’s US industrial production (August) and the NY Empire Manufacturing index (September) are worth keeping an eye on. The ZEW investor sentiment gauge is due in Germany (September). We doubt data will have a major impact in the run-up to the Fed meeting tomorrow though. Markets are preparing for a dovish Fed that is likely to elaborate and build further on the recent framework review. While we see risks for a disappointment tomorrow (some expect more explicit forward guidance already but we do not), there’s no reason to row against the current tides today, i.e. a cap on interest rates and a lid on the dollar. EUR/USD could reclaim 1.19 rather soon. There is room for the trade-weighted dollar on its way south in the downward trending channel. This morning’s better-than-expected UK labour report will soon be forgotten as sterling eyes the debate on Johnson’s Internal Markets Bill. It still has several hurdles to take and opposition to the bill, even in Johnson’s own Tory party, is growing. However, it is unlikely to see the pound flourishing in current, uncertain circumstances. We remain wary on sterling, also from a technical perspective.
News Headlines
August Chinese data showed production continuing to do the heavy lifting in the post-Covid recovery. Industrial production is up 5.6% Y/Y and 0.4% YTD YoY, driven by public-work projects. Retails sales turned positive Y/Y for the first time since, but remain down -8.6% Y/Y YTD, pointing to sluggish retail activity. Fixed investments are down -0.3% YTD YoY. The surveyed jobless rates declined from 5.7% to 5.6%, the lowest since January (5.3%) and down from a 6.2% peak in February.
The US administration blocked US imports of cotton, apparal and other products from China’s Xianjing region. They are aimed at combating China’s use of forced labour by detained Uighur Moslims in the region. Chinese President Xi Jinping held a teleconference with EU leaders yesterday, snubbing external interference in China’s internal affairs.
