Markets
The ruling trend on the US Treasury market continued yesterday, even if Asian/European investors doubted over an election interfering report (Russia, Iran). That said the tone for a fragile risk environment for most of the day, slightly underpinning core bonds. However, US investors have their eyes on the price and target a blue election sweep resulting in massive fiscal stimulus. In anticipation, they put up bear steepening reflationary trades. US yields added 0.5 bps (2-yr) to 4 bps (30-yr) in a daily perspective. The US 10-yr yield waves goodbye to 0.8% resistance and has now focuses on the 0.95% June top. The US 30-yr yield is on a similar mission, closing in on 1.76% resistance. Breaking up the nominal yield increase shows contributions of both inflation expectations and US real yields. However, the add-on isn’t evenly divided. Inflation expectations added 13 bps since the start of the month, while real yields only gained 5 bps. This split helps explaining while the US dollar this month couldn’t really profit from higher US yields. On the contrary, it took until yesterday for the greenback to find some composure. The trade-weighted US currency and EUR/USD are both attempting to switch sides (upper/bottom half) within their respective trading ranges. The DXY pivot stands at 93, the EUR/USD pivot at 1.1831. Some euro weakness might be at hand as well this morning (EUR/USD 1.18) with Bloomberg running suggestive stories on additional ECB easing before the turn of the year. The German yield curve yesterday followed in the US’s footsteps with yields rising by 0.9 bps (2-yr) to 2.9 bps (30-yr), further relieving pressure from for example key support in the -0.62% area for the German 10-yr yield. Huge demand at a 30-yr Italian BTP syndication (€8bn print; >€95bn print) highlighted confidence in the ECB’s prolonged market presence.
Attention shifts to October PMI’s today. The September outcome already suggested that the Q3 recovery would be a one-hit wonder with services flipping back below the 50 boom-bust mark. Evolutions since confirm this feared double dip scenario with European coronacurve spiraling out of control and governments forced to bring societies to a (near complete) standstill. Consensus expects that a further softening in the services gauge (47 from 48) will pull the composite figure below the 50-threshold for the first time since June. Risks are probably tilted to the downside of expectations. In any case, we expect any market reaction to be asymmetric with moves more likely on weaker figures than on stronger ones. We therefore might see some additional euro weakness throughout the day while German yields could face more problems following the US reflation trade. UK October PMI’s are on the agenda as well. EUR/GBP 0.9007 has proven decent support so far. We don’t think that the EMU/UK PMI-combo will be able to trigger a break lower.
News Headlines
Britain and Japan today signed a new trade agreement. The deal marks the first UK big deal on trade after the country left the EU. According the Japan’s Ministry of foreign affairs the deal largely preserves the terms that ruled trade between the two countries when the UK was part of the EU. Amongst other the deal removes UK tariffs on Japanese cars to zero in 2026. The deal might also facilitate the UK’s aim to join the TPP free trade agreement.
Russian President Putin said that Russia doesn’t rule out delaying the oil production hikes that are planned under the OPEC+ agreement. Putin prefers to keep the current plan of easing production cuts starting from January, but the country is prepared the keep current restrictions longer if necessary. Brent oil yesterday rebounded north of the $ 42 p/b level and is holding stable this morning (42.35 area).
