Markets
Today’s trading is a copy-paste of yesterday with stocks and (US) core bonds gaining in lockstep, both under the assumption of a lame duck presidency at least for the next two years. Biden looks set for the White House (if he as expected wins in Nevada) but will have to deal with a split Congress. That means imposing new regulation and taxes and reversing Trump’s tax cut will be tricky while Democrat’s plans for massive stimulus face hurdles in the Republican-led Senate. European stocks received an additional boost from the EU Parliament reaching an agreement on the so called rule of law conditionality to the €750bn recovery fund. EU countries must uphold the European rule of law (eg. judicial independence) or they risk losing access to the funds. Some countries, including Hungary and Poland, were strongly against, preventing the already delayed fund from being launched. EMU stocks rise 1-1.5%. Investors further scaled back their reflationary trade bets in core bonds but the initial yield decline was much less compared to yesterday and even evaporated completely intraday. US yield changes are now marginal. German yields reversed a 2bps-intraday dip completely, trading 1-2bps higher across the curve as the European Commission painted a bleaker economic scenario for the block due to the coronavirus resurgence, under which it even assumes no deal with the UK. Growth next year is revised downwardly to 4.2% instead of 6.1% previously. Peripheral spreads tightened. Greece and Italy outperform (-3 bps).
The US dollar has a rough day, losing against virtually every currency. EUR/USD soared from the low 1.17 area to 1.183 currently amid risk-on and the EU clearing the recovery fund hurdle. USD/JPY dips below key support near 104 (July/September low). ‘Classic’ risk sentiment analysis would suggest a move in just the opposite direction (ie yen weakness). At USD/JPY 103.7, the pair is already testing next key support (103.67; 76.4% Fibo retracement March low-high). Central-European currencies jump. The Hungarian forint (EUR/HUF 358.15) and Polish zloty (EUR/PLN 4.51) outperform the Czech krona (26.75). The former two breathe a sigh of relief after their respective governments relaxed their opposition to the recovery fund. A catch-up move after the underperformance of both currencies during the October sell-off is also at play as well as general technical elements (eg. EUR/HUF falling sub 361.20). The forint strengthening will be closely watched by the central bank in its weekly setting of the one-week deposit rate which was today left unchanged at 0.75%. EUR/GBP weakening (stronger sterling) in the wake of the BoE’s larger-than-expected increase of the bond buying programme didn’t last, mainly due to euro strength. British Fin Min Sunak’s financial statement (see below) couldn’t convince the pound either. After drawing near to the 0.90 area, EUR/GBP rebounded to trade almost unchanged at 0.904. Cable rises to 1.307 as the dollar gets whacked.
News Headlines
The Norwegian central bank kept its policy rate unchanged at 0% and is expected to stay at the current level for several years. Still, the Norges Bank mentioned low interest rate policy increases risks for financial imbalances, e.g. in the housing market. The krone weakening slowed the decline of above-target inflation, but this effect will fade. Norway announced new restrictions in order to stop the spreading of the virus also today. The Norwegian krone today gained modestly on a positive risk sentiment. EUR/NOK is trading in the 10.87 area.
UK Finance Minister Sunak extended the government’s furlough scheme to end March. The scheme provides 80% of the pay of workers on temporary lay-off. Sunak also increased support for self-employed people. The scheme will be re-evaluated in January. The government will then assess whether employers should take a bigger part of the cost (currently 5%), taking into account the economic situation at that time.
