Markets
Trading on global markets showed somewhat of an indecisive, even slightly inconsistent picture. Recent trends of higher long term (US) yields and a weaker dollar continued. However, this wasn’t met by the ‘usual’ rise of (European) equities to complete the picture of a standard risk-on trading pattern. Eco data were few and had no impact on trading. US yields at longer maturities confirmed recent break above technical resistance levels with the 10-y rising further beyond the 0.80% level and the 30-y yield extending gains north of 1.60%. The rise in US LT yields was more or less evenly supported by a modest rise in inflation expectations (10-y inflation swaps revisit 2% today) and real yields as investors expect US fiscal and monetary authorities to jointly endorse a big additional economic support package, probably after the US election. The US yield curve further bear steepens with yields rising between 0.6 bp (2-y) and 2.5 bp (30-y). The US Treasury later today selling as much as $22 bln of 20-y bonds maybe also weighed on bonds longer maturities. German yields still only reluctantly join the steeping in the US. German yields are gaining 0.7 bp (2-y) to 1.4 bp (30-y). The German 10-y yield (-0.59%) returned above previous support near 0.60%, but the intraday price action (initial rise mostly reversed) suggests that it’s too early to already call it a trend reversal. A disappointing performance of European equities supports the outperformance of core EMU bonds. European equities are losing about 1% despite a positive close in the US yesterday and a modest gains in Asia this morning. US equities are little changed. Intra-EMU spreads versus Germany widen slightly with Greece (+6 bp) and Italy (+3 bp) underperforming. Italy announced a mandate for a sale of a new 30-y benchmark in the near future.
The slightly ‘diffuse’ picture on bond and equity markets and modest risk-off this time didn’t help the dollar. On the contrary, the TW dollar (DXY) dropped to the 92.75 area (open above 93.0). EUR/USD (1.1855) also tries to build on yesterday’s break of 1.1831. However, today’s USD weakness was most visible in USD/JPY. The pair recently often decoupled from the broader trends holding a consolidation pattern. However, the break below recent lows (105.04/104.94) accelerated selling, with the pair trading in the 104.65 area. 104 is the next key support. Will the BoJ already talk to address unwarranted yen strength? After weakening earlier this week, fortunes turned for the better for sterling today. EU negotiator Barnier indicating that a deal should respect the sovereignty of both parties in the Brexit negotiations was seen as potentially paving the way for new talks later this week. BoE’s Ramsden saying that the BoE has considerable headroom to extend QE and speaking in a more guarded way on negative interest rates was sterling supportive too. EUR/GBP dropped to currently trade in the 0.9060 area (0.9130 area early this morning).
News Headlines
Washington-based heavyweight Fed governor Brainard said that continued support from the Fed and federal relief spending is necessary to turn a K-shaped economic recovery into a broad-based one. The reference to the K-shape means that some sectors bounced back strongly from Q2 weakness while many households and small businesses have seen little to no improvement at all.
The Czech government decided to close all non-essential shops starting Thursday. It also limits its population movement to strictly essential trips (eg buying essentials, commuting to work). PM Babis imposed those stricter measures after authorities announced a record 11 984 cases and 42 deaths. He said that even though the country has a robust health-care system, it risks collapsing between November 7 and 11 (out of hospital bed capacity). Health minister Prymula added that currently around 32% of COVID-19 tests are positive. The Czech Koruna weakened slightly to EUR/CZK 27.20.
