Markets
Activity data recently often were second tier for trading. The focus was on inflation. Even so, divergence between Europe and the US yesterday was striking. German Ifo confidence painted a less upbeat picture on the outlook for Europe’s largest economy as businesses turn more cautious both on current assessment and on expectations. The new corona wave complicates a recovery that was already hampered by supply issues, especially for services. US data held up much better. US jobless claims (199 000 from 270 000) dropped to the lowest since 1969. Even if statistical issues were at work, it suggests ongoing improvement in the labour market. A smaller than expected trade deficit supports Q4 GDP growth. Durable goods orders were more mixed, but October spending and income data also suggested a solid start to Q4 even as prices accelerated further (core PCE deflator 4.1%, headline 5.0%). The minutes of the US early November Fed meeting confirmed recent Fed speak. Several Fed members were open to a faster reduction of asset purchases and earlier rate hikes if inflation continued to run higher. A curve flattening trend was already in place before the publication of the minutes. The 2-y yield touched a post-covid top at 0.65%. In a daily perspective, the 2-y rose +2.6 bps but LT yields turned south with the 10-y and 30-y declining 3.1 bps & 6.3 bps respectively! European bonds entered calmer waters after recent corona-related swings. German yields changed less than 1.5 bps across the curve. The script for the dollar and especially for EUR/USD didn’t change. DXY came within reach of the 97 mark. USD/JPY tested the March 2017 top (115.51). EUR/USD filled bids below 1.12. European equities closed mixed. The release of strategic reserves by the US and other countries didn’t impress markets. Brent Oli returned north of $52 p/b.
Today trading volumes will be thin as US markets are closed for Thanksgiving. Asian equities are trading mixed to modestly higher. The dollar rally is taking a breather. The eco calendar is meagre, but several ECB members will speak (Villeroy, Elderson, Schnabel). Also keep and eye at the Riksbank policy decision. In Hungary, it will be interesting to see whether the MNB will already use the flexibility of the 1-week depo rate to address persistent forint weakness. For EUR/USD, 1.1168 (June 2020 correction low) is intermediate support ahead of the 1.1040 area. The EMU 10-y swap tries to break out the 0.10%/0.22% ST range. A topside break would indicated resilience despite recent Covid headlines. The German 10-y yield is challenging similar resistance near -0.22%. EUR/GBP recently several times attacked the 0.8385 area, but a break didn’t succeed despite persistent euro weakness.
News headlines
South Korea’s central bank as expected hiked its main policy rate by 25 bps to 1%. All but one of the members voted in favour of higher rates to counter rising inflation and financial imbalances. Governor Lee said the current level is still accommodative, suggesting further tightening is still possible. It revised up the inflation outlook to 2.3% for this year and 2% for 2022. Unlike for this meeting however, Lee didn’t drop a hint for a specific timing for the next hike, saying it will depend on the economy. A few elements cloud the outlook though. Daily Covid cases surged to a new record this month after loosening restrictions. As Lee steps down in March 2022, he may opt to stand pat and leave further policy changes to his successor. Presidential elections are also scheduled for March as president Moon Jae-in’s term ends in May.
The EU agreed to delay new rules for the €53tn settled securities market after continued resistance from regulators and traders. Under the new regime, the EU would make buy-ins mandatory instead of voluntarily. Buy-ins protect a buyer in a deal if it fails because the seller did not deliver (on time) by letting the buyer appoint an agent. That agent then purchases securities from the open market, ensuring the buyer’s position is the same in case the original trade took place. It is the seller that has to cover any additional costs. Industry groups including ESMA and some finance ministries said firms were unprepared for the rules while warning that it would drive up costs and undermine competitiveness. They also said it could wipe out the economics associated with hundreds of smaller, illiquid trades.
