Markets
It turned out to be an outright risk-off session yesterday. A further acceleration of the second wave of corona infections in the UK and Europe raised concerns that new lockdowns or other restrictive measures might slow the pace of the recovery. At same time, there is probably less room for monetary or fiscal policy to accommodate the impact on the economy. Lingering (geo)political and economic tensions between the US and China also didn’t help sentiment. Technical pictures of several equity indices showed a loss of momentum. European equities finished with losses of 3.5% to 4%+. US equities finished off the intraday lows, but still lost between 0.13 % (Nasdaq) and 1.84% (Dow). Core yield curves bull steepened with US yields easing between 0.2% bps (2-y) and -3.8 bsp (30-y). Bunds outperformed. (2-y -2.9 bps; 30y -5.6bps).
The dollar clearly regained its status as preferred safe haven among the majors. The yen slightly disappointed. Despite the outright risk-off context, USD/JPY failed to break the 104.19 support. The pair even closed the day higher (104.65). The trade-weighted dollar (DXY) trended higher in the 93 big figure, but first resistance (94.00) was left intact. EUR/USD (close at 1.1771) for now stayed away from the 1.1696 support. EUR/GBP finished at 0.9185, a modest loss for sterling, giving the broader risk-off and expectations for new restrictive measures to contain corona infections which might be announced as soon as today. The risk-off also caused selling pressure on smaller less liquid currencies, with in particular the likes of the forint, the Czech koruna and the Zloty hit very hard.
Asian markets feel some spill-overs from yesterday’s sell-off in Europe and the US, but losses are more modest (about 0.5%, with Korea a distinct underperformer). Japanese markets are still closed. The yuan is correcting after recent gains (USD/CNY 6.79 area). The dollar (DXY 93.60) is holding most of yesterday’s gain.
Today’s eco calendar is moderately interesting with EC consumer confidence, US, Existing home sales and the Richmond Fed manufacturing index. However, markets probably won’t react too much to data with the focus on the latest statistics on corona infections probably being a better pointer on the future path of the recovery. Fed’s Powell (and Treasury secretary Mnuchin) will testify on the Fed’s crisis management before the House Services panel. The text of Powell’s statement is already available. The Fed Chair held its standard line that many economic indicators show a marked improvement, but employment and overall economic activity remain well below their pre-pandemic levels, supporting a call for further (fiscal) stimulus. On interest markets, the risk-off pushed the 10-y German and US yields lower in their recent sideways ranges. However we expect -0.56/-0.59% (10-y bund yield) and 0.60% (10-y US) to provide solid support. Dollar resistance at 94 (DXY) and 1.1696 (EUR/USD) remain the next references, which we still expect to hold. EUR/GBP is nearing intermediate resistance at 0.92. We stay cautious on sterling as the debate on negative interest rates might continue together with tougher economic restrictions.
News Headlines
The US Congressional Budget Office said debt in the country will swell to almost double the size of the economy over the course of the next 30 years, raising risks of a fiscal crisis. The agency expects debt to rise to 195% in 2050, up from 98% this year. Back in January, the CBO expected debt to rise to 180% in 2050. This budget path is unsustainable, CBO Director Swagel said, and borrowing costs will eventually become an issue.
RBA’s Deputy Governor Debelle laid out several policy easing options without signaling they are imminent. He said the RBA could lower the rate of its term funding facility, the 3y yield target or even the policy rate – though negative rates aren’t on the table right now. The RBA could also buy bonds further out along the curve. Debelle said a lower A$ would benefit the economy but ruled out FX intervention at this stage, saying it isn’t effective now.
