Markets
Dollar weakness is today’s most eye-catching, but also most inexplicable market move. It isn’t fiscally related. We lost track on the latest twists on Capitol Hill regarding pre-election fiscal stimulus, but hold our line that a big boost won’t come ahead of the November 3 Presidential election. Risk sentiment isn’t pulling the strings either. European stocks opened strong, but gains completely melted away. US futures on the other hand do suggest that Friday’s late swoon will be undone at the opening bell. Rumours that a Republican Senator would present a regulatory bill against big tech this week, triggered that profit taking in Friday’s final trading hour. US real rates are another usual suspect to scrap of the trigger for USD-weakness list. They add 1 bp. The US yield curve bear steepens with (absolute) yields rising by 0.6 bps (2-yr) to 2.6 bps (30-yr). The German yield curve bull steepens marginally with yields falling by 0.5 bps (2-yr) to 0.1 bp (30-yr). Whatever the reason, the trade weighted dollar retreats after failing to regain the 94 mark last week. DXY falls towards 93.25. First support kicks in around 93 flat. EUR/USD bounces away from the low 1.17 area to change hands around EUR/USD 1.1780 currently. First intermediate resistance kicks in at 1.1831.
Sterling had quite some weekend news to digest. Initially, it coped well despite the inconclusive EU Summit and a Moody’s UK credit rating downgrade (Aa2 to Aa3). Investor hope that the UK House of Lords can cut the sharp edges of UK PM Johnson’s UK internal market bill, thereby unlocking the stalemate between the EU and UK on trade. However, as European risk sentiment soured, so did the UK currency. EUR/GBP shows a V-shaped trading pattern, bouncing back from 0.9020 to 0.9070. We expect volatility to remain part of investors’ daily lives between now and end October/early November; the final deadline for an accord which next needs to be ratified and implemented before the end of the year.
10-yr yield spread changes vs Germany widen by up to 4 bps today with Greece and Italy underperforming. The FT reports that this year’s EMU government budgets will be nearly €1tn this year, or 8.9% of GDP. That’s way more than the previous record spending in 2010, when the EMU budget deficit was 6.6% of GDP. Four countries exceed the 10% of GDP threshold: Spain, Italy, Belgium and France. Belgium in any case is well advanced in funding this year’s costs. Thanks to today’s OLO auction (€1.8bn), the debt agency already completed 91.41% of this year’s €46.5bn OLO funding need. The EU today announced near term (likely tomorrow) syndications (10y & 20y) of its first social bonds to fund SURE (temporary Support to mitigate Unemployment Risks in an Emergency).
News Headlines
France will expand its aid measures with a €20 bn package of quasi-equity loans partially backed by the state, finance minister Le Maire announced. Under the scheme, banks would first lend to SMEs and then sell 90% of the partially state-guaranteed loans to institutional investors. The government aims to give small, unlisted companies financing options other than more pure debt that could refrain overburdened companies from investing.
The Irish cabinet is convening today to finalize restrictive measures to contain the pandemic spread. Stopping short of a full lockdown, the government indicated it would close all non-essential stores, restaurants and bars. In other European countries including Switzerland, Belgium, Slovenia and France, tighter rules also took effect today.
Hedge funds trimmed their bullish euro bets at the fastest pace in eight months. Analysts point at the resurgence of the coronavirus dampening Europe’s growth outlook as undercutting the single currency’s momentum. ECB Lagarde warned that the new virus curbs will increase uncertainty and put the recovery further from reach.
