Markets
A Friday with only second tier data scheduled in the US and Europe. This was supposed to yield technical trading going into the weekend. However, the scenario was overthrown by ‘good old corona’ returning back to the spotlights from never been really away. Austria imposed a lockdown that can last 20 days. At the same time, the German Health Minster said that corona infections are developing in a way that a new lockdown in Europe’s largest economy can’t be rule out. Such a move inevitably would be an unexpected blow to, at least short term growth prospects. The comments sent markets in an outright risk-off spiral. German yields nosedived, with the belly of the curve outperforming (5-y -5.5 bps; 10y -6.2 bps) the wings (2-y -2.2 bps;30-y -4.5 bps). A bit surprisingly, the move was driven by a sharp fall in EMU inflation expectations. (10-y inflation swap -7.5 bps, returning below 2.0%). German October PPI rising an astonishing 18.4% Y/Y was absolutely no topic for markets anymore. ECB Lagarde repeated that despite ‘unwelcome and painful’ inflation, the ECB doesn’t intend to raise rates. Her analysis that ‘at a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening would represent an unwarranted headwind for the recovery’, at once also looked less ‘controversial’. The safe haven bond rally also spilled over outside Europe. Of course, today’s corona developments in Europe at some point still might reoccur in other regions, including the US, as well. US yields are declining between 4.5 bps for the 30-y yield and 6 bps for the 5-10 y sector. Even sterling yields dropped approximately 5 bps across the curve. Solid October retail sales completed a strong update on the UK economy this week, but couldn’t help. European equity indices are off the intra-day lows, ceding 0.5%-1%. In the US the Dow loses 0.5%. The S&P is little changed. In this ‘low yield context’, the Nasdaq apparently also still has some safe haven role to play (+0.4%) .
FX trading developed according to an old-school risk-off script. Especially the comments from German health minister Jens Spahn pushed the euro off a cliff. EUR/USD at some point dropped more than one big figure to the 1.1250 area and currently trades near the 1.13. So, yesterday’s pause in the EUR/USD sell-off was very short-lived. The technical picture remains fragile. The DXY trade-weighted USD index returned to the 96 area but the move was mitigated by yen outperformance (USD/JPY 113.85 from 114.50 this morning). EUR/JPY intraday came close to the 127.93 key support, but for now no break occurred yet. The risk-off repositioning for sure will also ring alarm bells at the Swiss national bank. Safe have flows pushed EUR/CHF below the 1.05 key support. At 1.0470, the franc trades at the strongest level against the euro since July 2015! The opposite reaction is visible for smaller, currencies especially from countries that are battling high inflation. Despite recent efforts from the NBP and the MNB, the zloty (EUR/PLN 4.69) is trading at the weakness level since March 2009. The forint (EUR/HUF 367.75) is nearing record low levels just below EUR/HUF 370. Even the Czech krona weakened from EURCZK 25.25 to 25.40. Sterling largely escapes the risk-off repositioning even as UK yields decline in line with Europe. EUR/GBP dropped below the 0.84 handle on the back of solid UK retail sales and broad euro weakness. At 1.3460, cable is limiting potential damage.
News Headlines
Norwegian mainland GDP grew 0.6% q/q in the third quarter. That’s slightly more than consensus estimates of 0.4% but came with a minor downward revision of Q2 from 1.1% to 1%. Compared to the same quarter a year earlier, the Norwegian economy is now 2.6% larger. Growth was broad-based with household consumption (6% q/q) taking the lead over government expenditures (1.3%) and gross fixed capital formation (1.1%). Net exports contribution was positive with exports rising 6.5% vs. imports 5.8%. Including Norway’s vast oil sector, GDP expanded 2.2% q/q thanks to a whopping 10.7% q/q increase in petroleum activities. The NOK loses out against the euro today in a decline solely driven by risk-off. EUR/NOK surpassed 10 yesterday and is testing resistance at 10.05 today (38.2% EUR/NOK recovery of the July-Oct decline).
