Markets
A multitude of elements ranging from disappointing Covid-trials by Sanofi and GlaxoSmithKline over the impasse at US stimulus talks and a looming (eventually avoided) shutdown threat to the Brexit stalemate put markets on edge last Friday. Regarding the latter, the atmosphere was outright negative as talks were headed for another deadline on Sunday. The topic also overshadowed the EU member states finally rubberstamping on the EU budget and recovery fund after persuading Hungary and Poland. Unsurprisingly, the pound was Friday’s underperformer on currency markets. EUR/GBP temporarily jumped beyond 0.92 but closed near 0.916 eventually (up from 0.913). Several gauges of sterling volatility spiked. The Brexit uncertainty weighed on the euro as well as comments from ECB’s Villeroy, suggesting the central bank could and would act against excessive euro strengthening. EUR/USD retreated from an intraday high at 1.216 to 1.211. Risky assets slipped though US equities recouped most of intraday losses during the session. Core bonds gained with the Bund outperforming. German yields fell 1.8 bps (2-yr) to 5.3 bps (30-yr). The US yield curve bull steepened with yields down about 2 bps at the short end of the curve.
Asian-Pacific markets trade mixed-to-positive this morning with Japan one of the countries in the green after a better-then-expected Tankan index (cf. infra). The pound jumped a full big figure before gradually easing again to north of EUR/GBP 0.91. EC president von der Leyen and UK PM Johnson agreed to “go the extra mile” even after missing yet another deadline yesterday but with diplomats noting incremental progress at all fronts. No new deadline has been set this time around. In the US, a group of bipartisan lawmakers will propose a new stimulus bill worth $908bn, adding to the cautiously optimistic start of the week. EUR/USD trades near intraday highs at around 1.214 with the trade-weighted dollar displaying the mirror image at 90.75. Core bonds retreat.
We expect the themes dominating Asian trading to also put their mark on European and US dealings given the empty eco calendar today. In the market’s view and even though nothing changed materially, the narrative in both topics changed over the weekend: ongoing Brexit talks suggests there’s at least some movement while the bipartisan stimulus proposal is hoped to unlock the stalemate and at least keeps talks going. Equity futures suggest a green opening in Europe, shrugging off a strict lockdown in Germany that will take effect from Wednesday onwards. Core bonds remain in the defensive. The pound could hold on to at least some of its gains but we don’t expect the rally to go very far until prospects of an actual agreement arise. UK officials suggested talks could drag on to Christmas. The US dollar and EUR/USD hover near 2020 lows/highs respectively. Directional trading could remain absent as markets await impetus from the Fed and (exceptionally early) European PMIs on Wednesday.
News Headlines
Tankan business sentiment improved more than expected. The headline Large Manufacturing index recovered from -27 to (a still low) -10, vs. a more moderate -15 expected. Sentiment among large non-manufacturers and smaller companies also improved more than expected. Uncertainty on the developments of the pandemic weighs on investment plans as companies expect investment to decline 1.2% this fiscal year.
According to sources, the ECB is holding a rather conservative approach as it is weighing to allow bank to restart dividend payments next year but wanting to keep a big capital buffer in the financial system. The proposals for the amount that strongest banks will be allowed to pay are said to be stricter than what Bank of England approved last week. The Bank of England last week allowed banks distribute 25% of profits.
