Markets
In line with price action earlier this week, trading in the major markets remains sentiment driven. Today, investors again saw the glass half full. The story on an additional US fiscal stimulus can be labelled as becoming some kind of an evergreen. It is almost impossible to assess the merits of daily headlines on process of reaching such a deal. After some ‘cautious’ headlines yesterday, markets today embraced comments of US Treasury Secretary Steven Mnuchin as he remains on speaking terms with House speaker Nancy Pelosi and as the Republican party made a new proposal that was said to come closer to what the democrats are looking for. For now, it is enough for the risk-on trade to continue. European equities are gaining a modest 0.5% on average. The US again outperforms with gains of up 1% for the Nasdaq. Eco data in this environment remain of secondary importance as a guide for global trading. Even so, following a strong set of US data yesterday’s, today’s releases also pointed in the same direction, supporting the bid for riskier assets. US jobless claims declined more than expected in the week ending 26 September (837k from 873k) confirming the, albeit gradual, improvement in the labour market. The closely watched price indices from the August spending and income report also printed higher than expected (core deflator 1.6% Y/Y from 1.4% Y/Y). Inflation is still quite some distance away from the Fed’s symmetrical 2% target. Even so, the US yields steepened further after the publication of the data. US yields are rising between 0.6% bp (2-y) and 3 bp (30-y). This time, US 10-y real yields remained little changed (-0.95 %). The German curve shows a more modest bear steeping with yields rising up to 1.5 bp (30-y). 10-y intra-EMU spreads versus Germany narrow marginally (-2 bp for Greece and Italy).
Sterling traded again notoriously volatile today. Less constructive Brexit headlines compared to previous days triggered sterling selling this morning. The moves was reinforced on comments that the EU sent a ‘letter of formal notice’ to the UK over its Internal Market Bill. EUR/GBP jumped almost a full big figure to fill offers in the 0.9155 area. The move was reversed after a tweet from a Financial Times correspondent that a ‘ landing zone on state aid’ has been identified. Later headlines of EU officials again sounded far less upbeat. In extremely choppy trading, EUR/GBP currently trades again in the 0.91 area, but it is highly unlikely that is there to stay for long.
Compared the sharp swings in sterling, USD trading developed in much calmer conditions. The modest risk-on still slightly outweighs better US data and higher yields. EUR/USD is trading in the 1.1750 area. The TW dollar is losing a few more ticks (93.75 area). USD/JPY outperforms (105.65 area), probably on higher core yields. CE currencies (EUR/CZK 25.90, EUR/HUF 360 and EUR/PLN 3.49) convincingly continue the rebound that started earlier this week as local central bankers indicated that the were prepared to address excessive currency weakness and higher inflation.
News Headlines
Swedish PM Lofven could face a vote of no confidence put forward by the Left Party if he pushes through with labor market reforms despite talks with labor unions and employers’ groups collapsed. Lofven runs a minority government with support from the Lefts in parliament. The Swedish krona ceded (marginal) ground only temporarily before even strengthening a tad after Riksbank governor Ingves said there’s not much scope for rate cuts.
Hungary is willing to opt out of the EU’s €750bn recovery fund, skipping participation in its financing but also forgoing on receiving payments from it. Hungary is expected to at least receive €6.5bn in grants. The country is against the fund’s rule-of-law conditionality which the EC accuses PM Orban of breaching, thus possibly preventing handouts. All EU nations must formally agree with the fund and its joint financing for it to go ahead.
