Markets
US president Trump announcing during early Friday trading hours he got infected with the coronavirus triggered an uncertainty shockwave. Equity (futures) markets plunged more than 2% with disappointing September payrolls (halved compared to August!) weighing additionally on sentiment later on the day. Steep losses were pared somewhat after Speaker of the House Pelosi signaled that additional relief for the airline industry is in the making. Markets interpreted it as overall fiscal talks with the Republicans are advancing even tough Pelosi highlighted significant differences remain. US stocks still closed more than 2% in the red. Tech underperformed amid reports US Congress may propose legislation that would force the likes of Amazon to separate their main businesses from other activities. Brent oil dipped below $40/barrel again. Core bonds held tight to their initial morning gains until US dealings kicked in. Both German and US yields jumped off intraday lows for no apparent reason across the curve, erasing all earlier losses. US yields even rose more than 3 bps at the long end of the curve. The dollar had a bumpy ride. EUR/USD touched key support near the 1.17 area multiple times but a break didn’t occur. The couple eventually closed near 1.172, slightly down from 1.174. The trade-weighted dollar finished virtually unchanged in the high 93.8 zone, a disappointing performance given the moves in equity. USD/JPY rebounded from an intraday low at 105 to end at 105.29 (down from 105.53). Sterling soared after reports that UK PM Johnson would personally weigh in on Brexit talks to try to unlock the stalemate. EUR/GBP fell from 0.911 to 0.905, defying the negative risk climate. Support at 0.903 (38.2% Fibo retracement) remained unchallenged though.
The weekend was coloured with a series of – sometimes conflicting – headlines related to Trump’s health. The take-away is that he is improving but probably was in a much worse condition than initially reported. Meanwhile, talk of renewed (local) lockdowns is building in France (Paris to shut down bars) and Italy over the UK (three-tier lockdown system) to New York (schools and non-essential businesses in several districts). Asian stocks trade comfortably higher nevertheless. Australia is leading (+2.6%). Volumes are below-average with China still closed though. Core bonds trade weaker, the Bund underperforming. The US dollar loses ground in a typical risk-on move. EUR/USD rises towards 1.174, undoing all of Friday’s losses. A similar story holds for USD/JPY (105.57). We think the greenback could (marginally) lose further today. Trump’s entourage will continue to play down the effects from Covid-19, instead highlighting his improving state. That should reduce overall uncertainty. We don’t expect a dollar decline to go very far however as there is still a lot of confusion lingering. We also keep a close eye on the US non-manufacturing ISM. Risks are tilted to the downside, especially after “stronghold” manufacturing started showing signs of weakness last week. A disappointing outcome could limit core bond yields’ upside too. Sterling displayed some strong swings on the drumbeat of Brexit headlines last week. The tone turned slightly more constructive but Barnier noted “persistent serious divergences”. Unless both sides manage to overcome those, we assume EUR/GBP 0.90 to hold.
News Headlines
German Foreign Minister Maas expects the EU to take targeted and proportionate sanctions against Russia at the upcoming October 15 EU Summit because of the Navalny poisoning. “Such a grave violation of the International Chemical Weapons Convention cannot be left unanswered. On this, we’re united in Europe,” he added.
The Argentinian peso weakened sharply last Friday, with USD/ARS nearing 77 from a 76.20 open as the central bank ends its policy of “uniform devaluation” and will allow for greater volatility. Simultaneously, the central bank raised the repo rate from 19% to 24% but that couldn’t stem the slide of the peso.
