Markets
The risk rally met a roadblock yesterday. Especially US indices fell prey to profit taking. Stimulus talks continue, but the process doesn’t yield any concrete progress. The correction accelerated on the anti-trust charges against Facebook (cf infra). US indices lost between 0.35% (Dow) and 1.94% (Nasdaq). German yields changed less than 1 bp. The US curve bear steepened (-0.2 bp 2-y; +2.2bp 30-y), but LT yields closed off the intraday peak levels. The 10-y Treasury action showed mixed statistics, but the market reaction was constructive. The dollar succeeded a mild comeback (DXY close at 91.08, EUR/USD close at 1.2180), but the move didn’t change the broader picture. The dinner between UK PM Johnson and EU Commission President von der Leyen failed to deliver a breakthrough. Both parties couldn’t but acknowledge each other’s red lines. Brexit talks will continue with Sunday December 13 the new deadline. Sterling’s reaction is guarded. EUR/GBP returned to 0.9050 area.
Asian equities mostly show modest losses this morning in the wake of yesterday’s setback on WS. Futures suggest some further losses in Europe and the US too. The picture in FX is mixed. The yuan is losing a few ticks (USD/CNY 6.5460). The Aussie dollar (AUD/USD 0.7465) remains well bid holding near the strongest level of 2020. The dollar struggles to maintain yesterday’s gain (DXY 91.05; EUR/USD 1.2090).
Today’s eco calendar is better filled with amongst others US CPI inflation and weekly jobless claims. The latter remains a barometer on the impact the new virus wave on the economy. However, at that time the focus will be on ECB president Lagarde’s press conference explaining the recalibration of policy. New ECB staff economic forecasts (including a first assessment for 2023) should lay the groundwork for the new support package. Growth was stronger than expected in Q3, but the second corona wave might cast a long shadow on activity well into next year, with the positive effects a vaccine only slowly filtering through. The forecast will also reveal inflation below the 2% target in 2023. The cornerstone of the news support will likely include a rise in the PEPP envelop of €500 bln (to €1850 bln) with buying probably extended from mid-2021 to mid-2022. Bank lending might be further encouraged by via additional TLTRO funding, maybe at amended conditions. From a market point of view a lot should already be discounted. Markets might also perceive today’s action as potentially marking the final ‘big shot’ of this easing cycle. If the global reflation trade continues, LT core yields might bottom with 0.65%/0.67% area marking a high profile support for the German 10-y yield. The extension of the PEPP should continue to support the bid for peripheral bonds. We also look out for ECB’s assessment on the euro. Recent strength complicates the ECB inflation aim, but verbal interventions probably won’t impress as the ECB isn’t prepared to walk the talk, with a cut of the deposit rate unlikely. Temporary corrections in EUR/USD are possible, but they probably will come from pockets of USD strength (setbacks in the reflation trade) rather than from an outright weakening of the single currency.
News Headlines
The Bank of Canada left its policy rate unchanged at its effective lower bound of 0.25%, maintains its guidance that it probably won’t adjust rates higher until into 2023 and holds its weekly pace of asset purchases (CAD $4bn/week ) steady. The economic path ahead remains choppy. A better-then-expected Q4 2020 could be followed by a weaker Q1 2021 as record high Canadian corona-cases could force a re-imposition of restrictions. Measures of core inflation are all below 2 percent, and considerable economic slack is expected to continue to weigh on inflation for some time. The Canadian dollar didn’t react on the outcome. USD/CAD continues to hover near multiyear lows around 1.28.
The US Federal Trade Commission and almost every US states sued Facebook for a “years-long course of anti-competitive conduct”. The FTC says that Facebook abused its social media dominance to dwarf competition. Especially the acquisitions of Instagram and WhatsApp are thorny issues where the FTC hopes for a divestment, breaking up the monopoly. Separately, the EU wants big tech firms to take greater responsibility for policing the internet or face fines of up to 6% of their turnover, according to draft regulation seen by the FT.
