Markets
Hesitancy, reluctance and caution is the most adequate description of global mood at the start of the last trading session of the week. Headlines on corona are again the dominant factor for sentiment. Rising cases in Europe (and elsewhere) and subsequent actions to limit social activity are raising uncertainty on the economic recovery in Q4, with especially the negative impact on employment a growing source of concern. In the first phase of the crisis, markets soon felt the backing of ample monetary and fiscal support. However, investors fear that firepower from additional fiscal/monetary measures, if any, won’t provide similar protection as was the case in that first phase. Fed Chair Powell (and other governors) this week using every occasion to call for more fiscal stimulus was only met by a lukewarm reaction from the US government. It reinforced the feeling that the economy and markets move to some kind of ‘stand-alone’ regime, at least until after the US elections. The new proposal of the Democratic Party on a $2.2 trillion package gave some hope yesterday, but it remains highly unsure whether it will unlock the stimulus stalemate. The less generous new UK stimulus measures as announced by UK Fin Min Sunak left investors with a similar, ambiguous feeling. With few data or other news to turn the narrative for the better, investors kept a ‘better safe than sorry’ attitude going into the weekend. European equities opened little changed but are now losing 0.5%/1.5%, the technical graphs showing ever more signs of fatigue. US indices are currently losing less than 0.5%.
Core US and EMU bonds yields also follow the broader risk off trend. US yields decline between 0.6 bp (2-y) and 1.1bp (5-y). German bunds again outperform declining between 1 bp and 3 bp (30-y). The German 10-y yield (-0.52%) is further drifting below the symbolic reference of the ECB deposit rate with the -0.56%/-0.59% support again coming within reach. The Bund future contract (174.55) is also nearing comparable resistance in the 175 area. 10-y intra-EMU spreads remain rather resilient to rising uncertainty with Greece slightly underperforming (+3 bp).
On the FX market, the dollar rally showed some tentative signs of stabilization in Asia and at the onset of European trading. However, the new downturn in European equities soon revived this week’s USD bid. The trade-weighted dollar (DXY, currently near 94.55/60) trades near the highest levels of the week. EUR/USD dropped to the 1.1630 area. A weekly close below the 1.1696 confirms this week’s improved ST sentiment on the USD. The yen still fails to take up its traditional safe haven role with USD/JPY reversing an earlier dip to trade again in the 105.50 area. Smaller currencies like the SEK and NOK remain in the defensive, but losses are more modest that earlier this week. The Czech koruna and the Hungarian forint enter calmer waters after this week’s CB communication/action (HUF). The zloty is an underperformer in the region with EUR/PLN (4.56 area) nearing the 4.60 key resistance. EUR/GBP showed some nervous intraday swings. EU and UK negotiators are preparing a new round of talks on a post-Brexit arrangement. EUR/GBP is trading in the 0.9135 area (compared to 0.9155 at the start of trading this morning).
News Headlines
The Turkish lira briefly rose to its strongest level since early September (EUR/TRY 8.80) after the national banking regulator (BDDK) eased trading restrictions for foreign investors. Banks can execute an higher amount of derivatives including FX swaps. The market reaction resembled the one after yesterday’s 2% rate hike by the central bank: a dead cat bounce. Too little, too late for TRY.
Hungarian FM Varga said that the country sticks to the target of bringing the budget deficit below the 3% of GDP threshold next year after the Corona pandemic blew a hole in public finances this year (7% to 9% deficit). The Hungarian forint is already backtracking on yesterday’s advance which came as the Hungarian central bank raised the interest rate on its one-week deposit facility by 15 bps to 0.75%. EUR/HUF changes hands around 363.
