Markets
European and US stock markets both suffered from the same disease yesterday: swooning after a stronger opening. The damage to the US (-1.5%) was bigger than to Europe (-0.5%). The US carrot and stick rally seems to have finally come to an end. Massive fiscal stimulus is unlikely to deployed ahead of the US elections. The greenback only stabilized during US dealings, fainting before despite the fragile risk environment. DXY fell below 93.50. First support kicks in around 93 flat. EUR/USD bounced away from the low 1.17 area to change hands around EUR/USD 1.1770 currently. First intermediate resistance kicks in at 1.1831. A new multidecade high in NAHB Housing index (Oct) couldn’t change fortunes. Fed vice-chair Clarida suggested that the US recession which started in March is already over. However, it could take another year before growth is back at pre-pandemic levels. Clarida also believes that additional support from monetary and likely fiscal policy will be needed. German Bunds slightly outperformed US Treasuries in an uneventful bond session. The German 10-yr yield at -0.62% remains in the danger zone (see graph). Sterling initially benefited from US House of Lords’ likely efforts to cut sharp edges from PM Johnson’s UK internal market bill, but EUR/GBP eventually showed a V-shaped trading pattern, closing at 0.9092 from 0.9086. UK Chief brexit negiotator Frost remains hawkish, tweeting that the EU still needs to make a fundamental change in approach to the talks and make clear it has done so. The UK snubbed the EU’s proposal to draft a legal text for the first time. Another carrot-and-stick rally which might find itself in trouble any time soon? First real resistance in EUR/GBP stands at 0.9292.
Today’s eco calendar only contains US housing data, leaving way for general risk sentiment to set the tone. Futures point at some more optimism compared with yesterday, but we remain guarded in that interpretation. It would be telling if the dollar remains in a soft spot should equity gains evaporate further. On the bond market, it would be telling if the German 10y yield holds its head above water in such circumstances. Special attention goes to supply. The EU will embark on a first issuance programme which will eventually see it become one of the biggest issuers of high-rated debt (two AAA ratings). It aims to sell inaugural 10y and 20y social bonds to support SURE, the temporary Support to mitigate Unemployment Risks in an Emergency. The social bond programme aims to raise €100bn. Issuance for the bloc’s €750bn pandemic fund will start by the end of Q2 next year. We wondered before whether such mammoth AAA-issuer could take some shine of Bunds in the long term, triggering some Bund underperformance by reducing its safe haven status.
News Headlines
US Secretary of State Mike Pompeo advocated to increase the trade between the US and Brazil as a way to decrease the two nations’ dependence for critical items to be delivered by China. The two countries signed a protocol on three agreements that are said to lay the groundwork on expanding trade ties between the two countries and identifying priority sectors to reduce trade barriers.
At the Minutes of the October policy meeting, the Reserve Bank of Australia indicated that further policy easing was likely to gain more traction after restrictions on some parts of the economy are lifted. With respect to financial stability, the RBA assessed that it was likely that there were greater financial stability benefits from a stronger economy, while acknowledging that risks in asset markets had to be closely monitored. In a Q&A after a speech, RBA’s assistant Governor Kent indicated that there was still room to compress interest rates from the current level. AUD/USD dropped to the 0.7040 area after the comments. In New-Zealand, RBNZ governor Orr stroke a soft tone by saying he would “prefer to be battling with the quality problem of re-containing high inflation than the real challenge of battling deflation”.
