Markets
The ‘by default’ risk-on optimism that reigned global trading recently, simply continued today. Asian and European equities joined the rally from WS yesterday, even as gains on European markets (0.75%) still slightly lagged yesterday’s WS gain (1.74% S&P). US indices also again opened with gains of about 0.5%. Constructive sentiment is still mainly attributed to ongoing market anticipation of additional fiscal stimulus, in particular in the US. US president Trump earlier this week delayed the debate on a global stimulus package until after the presidential elections, but soon afterward indicated he is still prepared to support smaller targeted initiatives to support specific parts of the economy. Markets probably also anticipate a substantial fiscal package after the US election, whatever the outcome of the ballot. Even so, the ongoing rally of risky assets is an indication of underlying market sentiment rather than a reaction to ‘hard’ news. Such sentiment-driven move remains vulnerable to headline risk. However, today, there was little high profile eco or other news. The only data series with market moving potential, the US initial jobless claims, disappointed with printing at 840 000, while a decline to 820 000 was expected, illustrating the ongoing tough labour market conditions. Still, the impact of the report was negligible. Contrary to yesterday, the risk-on today didn’t translate into higher core yields and/or a steeping of the yields curve. The US 10-y yield testing an important resistance (range top) near 0.80% made a further rise in yields less evident. The US curve is showing a (corrective) bull flattening with yields declining between 0.2bp (2-y) and 2 bp (30-y). Recent price concessions supported a successful 10-y Treasury auction yesterday. Interesting to see whether this is also the case for this evening’s $ 23bln 30-y sale. German bunds still outperformed Treasuries with yields declining between 1 bp (2-y) and 3 bp (30-y). The combination of a benign (core) yield environment and at a same time risk-on still supports outperformance of EMU peripheral bonds with 10-y spreads vs Germany declining up 3 bp (Greece, cf .infra).
The risk-on initially weighed slightly on the dollar, but the US currency staged a modest comeback early in US dealings. EUR/USD initially tried to gain some further ground in the higher part of the 1.17 big figure, but is currently again trading in the 1.1740 area. The account of the September ECB policy meeting showed that the market perception of potential further euro strength is a source of concern for policymakers as it might offset part the Bank’s efforts to address depressed inflation (expectations). In particular the pace of the euro’s appreciation rather than its level worried the ECB. The bank will continue monitor all incoming information, including the currency. Even so, the ECB’s focus on the pace of any euro appreciation doesn’t solve the issue that it probably has little ammunition to stop an unwarranted rise of the euro, if it was to occur. Sterling entered calmer waters after experiencing a volatile trading session on conflicting brexit headlines yesterday. EUR/GBP hovers near the 0.91 pivot.
News Headlines
The Greek 10y bond yield slipped to a new record low of 0.898% vs. a previous (intraday low of) 0.918%. Greece profits from major ECB and EU (recovery fund) support, squashing concerns over the country’s enormous pile of debt. The government expects public debt-to-GDP will be close to 200% in 2020 before declining in 2021. The draft budget presented on Monday assumes growth contracting 8.2% this year followed by a 7.5% rebound in 2021.
Hungarian inflation slowed from 3.9% to 3.4% y/y in September following an unexpected monthly price decline of -0.4% m/m. Core inflation declined from 4.6% to 4% while the Hungarian central bank’s (NBH) preferred target – excluding indirect taxes – fell from 4.2% to 3.5%. Slowing inflation eases pressure on the NBH being forced to tighten policy while the coronavirus is strengthening again. The forint appreciated to EUR/HUF 357.47.
