Markets
A slightly disappointing US September manufacturing ISM abruptly halted the two-day rebound higher in core bond yields. The index declined from 56 to 55.4 with production and new orders slowing. Employment rose to its highest level since July 2019 but remains below the neutral 50-line. Markets probably reacted somewhat disappointed as it was manufacturing rather than services which kept the recovery going so far. US yields eventually closed marginally (up to -0.6 bps) lower. German yields ended 0.6 bps to 1.8 bps lower. US stock markets, which opened on a positive note, set their intraday high seconds before the ISM release. They managed to eke out uneven gains ranging from +0.13% (Dow) over +0.53% (S&P 500) to +1.42% (Nasdaq). The dollar closed a rather dull session modestly lower (DXY: 93.71; EUR/USD: 1.1748). Sterling lived a second straight very wild brexit-related ride. It fluctuated intraday between 0.9062 and 0.8155 before closing at 0.9113. Uncertainty in the run-up to the October 15 EU-Summit remains high. We don’t position for outsized sterling gains and expect the UK currency to remain In the defensive.
A double whammy hit risk sentiment overnight. First, US House Democrats put their additional fiscal stimulus proposal to a vote without reaching bipartisan accord first. The Republican-controlled Senate is very unlikely to pass the Democratic bill. In our opinion, it suggests that odds on another pre-election bill became very slim, whatever some heavyweight politicians might say. Both sides on the aisle remain at loggerheads and unwilling to give each other credit. US President Trump delivered this morning’s second and biggest blow by announcing that he and his wife both tested positive on COVID-19. The announcement and resulting quarantine add another layer of uncertainty over the pending US elections. US equity futures lose up to 2% and more this morning. Most Asian stock markets remain closed, but Japan for example loses over 1%. Yen strength adds to the weakness with the Japanese currency cashing in on its status as safe haven. USD/JPY decline from 105.60 to the low 105-area. The dollar initially ranked second across majors with the trade-weighted greenback trying to regain the 94-handle. EUR/USD briefly attacked 1.1696. However, the US currency already seems to be running out of steam. Core bonds profit as well, but like the dollar fails to really create momentum. Trump’s corona-infection will dominate media coverage today and risks taking some shine of the US payrolls report. Consensus expects a 875k net job gain in September with the unemployment rate further receding from 8.4% to 8.2%. We see risks for a disappointing outcome which could add to the negative risk environment with investors probably preferring to err on the side of caution ahead of the weekend.
News Headlines
In a Reuters interview, Depty governor Virag of the Hungarian Central Bank indicated the MNB will use the one-week deposit rate as instrument to address inflation risks stemming from market volatility that weighed on emerging market assets, including the HUF. The MNB yesterday left the weekly deposit rate unchanged at 0.75% after raising it by 15 bps the previous week. Virag said that the MNB will maintain a lasting presence in the bond market via its government bond buying program, but the MPC will need to review the program, including the size and possibly the amount of weekly purchases before the bank’s bond holdings will reach the HUF 1 trillion limit.
US president Trump this morning announced that he and first Lady Melania had tested positive for Covid-19. The US president was tested positive after a close aide become ill as he was infected with Covid-19. Markets reacted with a standard risk-off reaction to the news.
The Japan August jobless rate rose to 3.0%, the highest level in more than three years. At the same time, the Job-to applicant ratio, a pointer for the availability of new jobs declined to 1.04, the lowest level in over 6 year. On the positive side, the number of employed workers rose by 110 000, the fourth straight month of job increases.
