Markets
US stock markets maintained opening gains, closing 1.5% to 1.9% higher compared to >+2.5% for Europe. The bulk of this improvement was already on the tables at the opening bell. The risk mood on markets turned more positive again over (US) fiscal stimulus and a brexit trade deal. News coverage so far suggests that it’s more hope than anything else. Anyway, the positive risk environment spilled to some other markets as well. The euro recovered part of last week’s losses against the dollar with EUR/USD closing in on 1.1696 which served as previous support. The trade-weighted dollar turned the opposite way, drifting back to previous 94 resistance. Sterling initially excelled across majors with EUR/GBP touching an intraday low at 0.9025 from a 0.9125 close on Friday before returning to EUR/GBP 0.9080. The intraday trading pattern on core bond markets showed a similar intraday U-turn. The US yield curve eventually steepened with yield changes ranging between -0.5 bps (2-yr) and +1.4 bps (30-yr). German yield changes remained limited between -0.3 bps and +0.5 bps. More evidence that the risk rally was uneven came from less liquid FX pairs, with NOK/SEK being the only notable outperformers, USD/JPY closing broadly unchanged around 105.50 and gold prices rallying around 2% in the 2nd half of trading, when most of the dollar losses were already on the table. Those signs suggest to be guarded about the signal coming from stock markets. Covid-19 cases remain on the rise with countries like the UK or the Netherlands again introducing stricter lockdown measures. ECB President Lagarde in a parliamentary hearing confirmed the central banks grim eco/inflation outlook and repeated that the central bank is ready to adjust all instruments as needed.
Asian stock markets are more mixed this morning, adding to our feeling that the 2-day risk rally risks running out of steam. Today’s eco calendar contains EMU September economic confidence, German inflation figures and US consumer confidence. September confidence data are expected to reflect both a worsening of the coronapandemic and a running off of some fiscal support measures. German inflation is forecast to return from negative levels to flat. Eco data thus probably won’t be a happy reading. A plethora of Fed speakers is a wildcard for trading as is tonight’s first presidential debate between Biden and Trump. Biden has a significant lead in the polls (50% vs 43%) going into this head-to-head. So far, markets haven’t suffered from election fever, but that might be the case if President Trump manages to tie the odds. Overall, we’d advise to err on the side of caution today given yesterday’s uneven risk rally which thrived on thin air. This suggests that the dollar could pick up where he left last week while core bonds could make some (technically insignificant) headway. Volatility on stock markets will remain high.
News Headlines
Nancy Pelosi, Speaker of the US House of Representatives said Democratic lawmakers have prepared new legislation on a $ 2.2tn coronavirus relief bill. The proposal includes new funding needed to avert catastrophe for schools, small businesses, restaurants, performance spaces, airline workers and others. Pelosi describes the bill as a compromise that reduces to cost of the economic aid. Pelosi and Mnuchin held talks on Sunday and Monday and they are expected to continue on Tuesday morning. The Democratic party initially proposed a $3.4tn relief package.
Tokyo September consumer prices were marginally higher than expected but continue to struggle. The headline figure declined from 0.3% Y/Y to 0.2%. The core measure excluding Fresh food printed at -0.2% Y/Y (from -0.3%). The decline in consumer prices is partially due to discount measures of the government to support domestic travel (Go-to-Travel). Negative price pressure will probably persist as other discounts (e.g. for restaurants) will work through and as last year’s sales tax hike will drop out of the figures later this year.
