Markets
The US Treasury yield curve bear steepenedagain yesterday. Yields increased by up to 3.1 bps (30-yr). Moves are extended this morning with the US 10-yr yield piercing through 0.80% resistance and the US 30-yr yield leaving behind 1.61% resistance. Upcoming supply (20y auction tonight) plays a role, but the rise of long term US yields also comes as election polls start attaching a significant likelihood to a Democratic flip of the US Senate after the November 3 elections. What once was supposed to be a very tight call, is now a 70% likelihood according to for example political blog project FiveThirtyEight. We have the impression that this likely blue sweep both slims chances of a pre-election fiscal deal (Democrats have the upper hand at negotiation table and Republicans won’t admit defeat) and raises the probability of a swift and large package after the November elections. The current (US Treasury) markets functioning resembles the one in the aftermath of Trump’s 2016 election win. After digesting the shock results, markets started focusing on the possible reflationary effect from his huge fiscal stimulus promise.It resulted in rising inflation expectations, higher US real yields and a bear steepening US yield curve. The impact on the US stock market at the end of 2016 was clear: it provided equities with another significant boost. Current valuations suggest that a repeat is less probable. On the FX market, it gave the dollar a brief sugar rally. In that respect, current dollar weakness is somewhat at odds with moves on interest rate markets. The dollar yesterday lost first technical support levels in several crosses. DXY dipped below 93 and is now in the lower half of its sideways range since August. EUR/USD makes a mirror move above EUR/USD 1.1831.USD/CNY is this morning testing the 2019 low at 6.65. For the first time, there were spill-over effects from the US yield rise to German yields as well yesterday. The German yield curve bear steepened slightly with yields adding 0.6 bps (2-yr) to 1.8 bps (30-yr). The German 10-yr yield is making a first attempt to get away from the dangerous -0.61% area. 10-yr yield spread changes vs Germany barely moved.
Today’s eco calendar won’t define trading conditions. Plenty of central bankers speak, we’ve heard their plethora of comments in favour of additional fiscal and monetary stimulus to counter the economic havoc caused by the Corona pandemic. Technical breaks in US (long) yields suggest that they can hold their upward momentum. Yesterday’s moves in dollar crosses suggests ongoing weakness for the US currency despite this yield momentum. We wonder how long this stretch can remain in place. EU/UK trade talks remain deadlocked as feared with sterling losing its patience. EUR/GBP closed at 0.9131 yesterday, from a 0.9092 open. The correction lower in this FX pair which started mid-September is over from a technical point of view. First real resistance in EUR/GBP stands at 0.9292.
News Headlines
The US department of Justice and 11 US states filled a competition lawsuit against Google. According to the complaint the company is the unchallenged gateway to the internet. The company is also said to have engaged in a variety of anticompetitive practices to extend an maintain its monopoly. Google denies the allegations.
Sweden’s Telecom regular TPS banned telecom equipment from Huawei and ZTE from its 5G network. The decision was based on an advice from the countries security service, describing China as ‘one of the biggest threats againstSweden’. A spectrum auction for 5G in Sweden is planned for next month.
The US and the UK yesterday started a fifth round of trade talks with the focus of the negotiations being on goods and tariffs. However, no target date for a deal has been put forward. Striking a trade deal with the US is important for the UK as reaching bilateral trade deals is one of the main benefits the UK regained after leaving the EU.
