Markets
The stock market rally fizzled yesterday with both European and US equity indices losing around 0.5%. The eco calendar was jampacked with softer than expected (and negative) German CPI figures, a surprisingly strong EMU EC confidence and the strongest US consumer confidence since March. However, none of them managed to trigger a market reaction. The more subdued market sentiment filtered in strength on core bond markets with German Bunds outperforming US Treasuries. The German yield curve bull flattened with yields shedding 0.5 bps (2-yr) to 2.5 bps (30-yr). The German 10-yr yield fell to the lowest level since early August with intermediate support levels of -0.56% (August low) and -0.59% (May low) approaching. The context of ample liquidity provided by central banks, volatility on stock markets and fear that the Q3 GDP revival will be a one-off, add to the current flattening pressure.
The US yield curve eventually closed broadly unchanged. Under the surface, higher US inflation expectations cancelled out a declining US 10y real yield. The latter already shed 8 bps this week compared to Friday’s close, eying -1% again. This could well be the reason why the dollar is losing its edge on FX markets again, irrespective of the risk climate (positive on Monday; vulnerable yesterday). The trade-weighted dollar for example closed just below the previous resistance broken last week of 94 (93.89 close) while EUR/USD returned in the August/September trading range after retaking EUR/USD 1.1696 (EUR/USD 1.1744 close). Sustained breaks in this data-heavy US trading week (ADP employment change, weekly jobless claims, US manufacturing ISM and payrolls still to come) would strip the dollar of any of its momentum. Yesterday’s leap higher in EUR/JPY (124 from 123) suggests some underlying euro strength as well though it’s hard to attach a specific reason to that (ECB? See below). EUR/GBP made a nice comeback an intraday low near 0.9050 to 0.9150. UK economic developments, the (mis) handling of the COVID-19 crisis and the looming Oct. 15 brexit deadline remain disadvantageous for sterling.
The first presidential debate between Trump and Biden ended in a cage fight rather than an intellectual sparring. US equity futures traded gains for losses throughout the reality TV show which doubted credibility on the next US president. Asian stock markets are mixed this morning with Japan underperforming (-1.5%) on yen strength. USD/JPY changes hands in the 105.50 area. Chinese PMI’s didn’t alter the trading picture. German employment data, US ADP labour market report and Chicago PMI feature on today’s agenda. Comments from the ECB’s Watchers conference are a wildcard. We have the impression that the more the ECB mentions the single currency (eg Lagarde testimony earlier this week), the stronger it gets. Verbal interventions lack teeth. Risk sentiment on stock markets and the evolution of (US) real yields remain on the market radar.
News Headlines
The first presidential debate between President Trump and Joe Biden developed in a rather chaotic way, providing little guidance on future policy intentions. The two threw insults and talked over each other, leaving little room to clarify positions in a structured and orderly way. President Trump declined to commit on accepting the results of the election or commit to a peaceful transfer of power if he loses the election.
China PMI’s pointed at an extension of the economic recovery in September. The official manufacturing PMI rose to 51.5 from 51. The private Caixin manufacturing measure basically stabilized at 53.0 (from 53.1) with activity in the sector supported by improving foreign demand. Activity in the services sector (official) rose further to 55.9 from 55.2, indicating a rebound in domestic demand. Chinese markets will be closed for a week of holidays starting tomorrow.
