Markets
What started as a corrective bull flattening move on last week’s sharp hawkish repositioning is starting to take on bigger proportions. End of month extension buying might be at play, but falls short from explaining what’s happening. Bond investors perhaps get some cold feet going into tomorrow’s ECB meeting and next week’s BoE gathering. The German Bundesbank’s 2021 GDP downgrade (2.6% from 3.5% in 2021) serves as a warning with scarcity of materials and rising gas prices the main culprits. The stagflation scenario doesn’t materialize completely though with 2022 growth upwardly revised from 3.6% to 4%. The bond rally continued unabated with UK Gilts and German Bunds outperforming US Treasuries. Underlying details again show that the UK move is driven almost solely by lower inflation expectations whereas real yields in the US and Germany are also downwardly oriented. German yields fall by 0.7 bps (2-yr) to 7 bps (30-yr) in a daily perspective. From a technical point of view, the German 10-yr yield drops out of the steep upward trend channel in place since the end of August. First support stands at -0.19% which is the neckline of a short term double top formation with targets at -0.39% and -0.41%. US yields lose up to 5 bps (30-yr) on a daily basis. Better-than-expected September US durable goods orders had no real influence. US investors due still face 5y and 7y Note auctions in the Treasury’s end-of-month refinancing operation. Today’s risk sentiment was less ebullient with main European indices losing slightly under 0.5% at the time of writing.
The Japanese yen and Swiss franc are today’s main beneficiaries of the yield setback. EUR/JPY spike below 132. USD/JPY again loses the 114-handle. Technical pictures for JPY aren’t really improving yet though. The Swiss franc reached its strongest level against the euro since the Summer of 2020 (EUR/CHF 1.0650). CHF is the odd one out these days, rising against the euro both in times of rising (real) yields and in the opposite (risk-off) environment. It’s noticeable that during the early October repositioning, even Swiss money markets started discounting a first rate hike over a 12-month horizon. We think that the invisible hand of the SNB will start to show in sight deposit data if the CHF-appreciation continues at the current pace. Today’s dollar performance was rather disappointing given the market context. DXY failed to retake the 94 big figure, changing hands around 93.80. EUR/USD opened just below 1.16 to currently trade near 1.1620.
News Headlines
The Swedish National Debt office said that a faster than expected economic recovery lowers the borrowing requirement of the Central government. The budget office upwardly revised the 2021 growth projection to 4.2% (from 3.5%). This higher growth will cause the Government budget balance to already become positive this year. Central government debt will this year decline from 26% of GDP tot 23% and drop further to 18% of GDP in 2023. Debt as measured according to the Maastricht criterion will ease for 40% in 2020 to 32% in 2023. The interest rate on 10-y Swedish government bonds declined 6.6 bps today. At the same time, the 2-yr yield rose marginally (-0.20%, +1.2 bps). Markets are pondering the consequences for Riksbank policy as a result of this faster than expected Swedish economic recovery. EUR/SEK extends its decline below 10.00 (9.9725 currently).
UK Finance Minister Sunak delivered a growth supportive message in the semi-annual statement on the UK budget. The UK government upwardly revised the UK 2021 growth forecast to 6.5% from 4% in March. In this scenario, the UK economy will probably return to a pre-corona level at the turn of the year. The OBR projected a budget deficit for the 2021/22 at around 7.9% down from of 10.3%. The better budgetary outcome gives minister Sunak leeway for additional spending. In this respect Sunak said that every government department would get a real increase in spending. The Chancellor also announced new rules to govern borrowing: a commitment that underlying public sector net debt must be falling as share of GDP and the government’s day-to-day spending must be balanced by revenues within three years. In normal times the government should thus only borrow to invest.
