Market movers today
Today is a quiet day in terms of economic data releases but there are tons of central bank speeches scheduled for today. Policymakers from the Federal Reserve, the ECB, Norges Bank, the Riksbank and the Bank of England are scheduled to speak throughout the day.
We will also look out for Brexit headlines, as the UK’s chief negotiator David Frost has told his EU counterpart Michel Barnier not to bother travelling to London for talks today. Despite the hawkish headlines, we continue to expect a deal will be reached in November.
Besides that we are looking very much forward to the flash PMIs for October from Japan, the euro area (including country-specific indices for Germany and France), the UK and the US later this week.
The 60 second overview
Brexit. On Friday, PM Boris Johnson said the UK will now start preparing for no deal, as the EU is not willing to compromise (after the EU said the same thing about the UK on Thursday). That said, Johnson fell short of saying that he will abandon talks altogether despite UK’s chief negotiator David Frost telling his EU counterpart Michel Barnier not to bother travelling to London today. Yesterday, Michael Gove said there is now less than a 50% chance of a deal, but we continue to think the two sides will reach one eventually (most likely in November). We think the current situation looks very similar to the withdrawal negotiations, when the political leaders eventually found a compromise and we assign 60% probability of a deal (40% of no deal).
Growth in China. China released fresh economic data this morning consisting of Q3 GDP growth and monthly retail sales and industrial production figures for September. Starting with GDP the Chinese economy expanded 4.9% y/y in Q3 (3.2% in Q2), meaning that year-to-date the Chinese economy is now slightly in positive and has thus recovered from the fallout in Q1. While growth was lower than the consensus forecast of 5.5%, equity markets did not seem to take much notice and closed only slightly lower, also taking into account the strong retail sales (+3.3% m/m) and industrial production (+6.9%) numbers. Especially the former are important for a further recovery, as the Chinese consumer year-to-date has spent some 9% less compared to the same period last year. Overall the economy seems to stay on the road to recovery, which is crucial for the global economic outlook as well.
EU bonds. The EU’s status as a less active supranational bond issuing entity is about to come to an end as funding for its EUR 100bn SURE programme will soon begin with the first benchmark potentially to be introduced already in the coming week (EU currently has EUR50bn outstanding). The SURE programme was launched back in May and is thus separate from the EUR750bn ‘Next Generation EU’-scheme landed in July as part of the EU’s budget negotiations for the years 2021-2027. The EU is rated AAA and we expect the first issuance to come at a discount to French government bonds of +10bp and EUR 15-20bn to be issued this year. The coming years, however, will be an entirely different ball game as c. EUR200bn of EU bonds will come to the market in 2021 alone and that pace is set to continue until 2024.
FI. Core EGB yields ended yet again lower on Friday (this time by 1bp), leaving German Bunds to touch fresh lows around -63bp, while periphery yields outperformed on mixed sentiment. The BTPs-Bund spreads tightened 4bp after the underperformance on Thursday amid Spanish supply and Brexit headlines. On Friday night, Moody’s downgraded the UK’s credit rating by one notch to Aa3 citing economic growth and the ongoing Brexit implications for the decision (the UK was already on negative outlook). We expect this to weigh on risk sentiment this morning spurring safe haven demand. Bund ASW continues to widen (to 34.2bp) on a strong bid for cash bonds and we continue to favour Bund ASW wideners and Schatz-Eonia wideners.
FX. Last week’s souring global risk appetite weighed on EUR/USD, while supporting EUR/SEK and EUR/NOK. In particular the latter, which rose back towards the 11.00 level. Barring a US fiscal deal or significant progress on Brexit talks, we are unlikely to see markets reverse course near term.
Credit. Sentiment improved in credit markets on Friday where iTraxx Xover tightened 9bp and Main 2bp to 326bp and 54bp, respectively.
Nordic macro and markets
See more in the FI and FX sections and in Weekly Focus: Europe has tightened COVID-19 restrictions further, 16 October 2020.
