- Most European equity indices show solid gains between 0.5% and 1.0% supported by good earnings and by a stronger dollar. Spain is the exception to the rule as political uncertainty intensifies.
- US equities also open in positive territory. The Nasdaq outperforms, supported by strong results from the likes Amazon, Google and Microsoft, published yesterday after the close of the markets.
- Catalonia’s parliament has voted overwhelmingly in favour of independence from Spain even as the Spanish authorities prepared to take direct control of the powerful and wealthy region.
- The US economy expanded at a 3.0% annualized rate in the third quarter, better than consensus. Personal consumption growth held up better than expected. Business investment also supported growth as did inventories. Net exports also contributed in a positive way. The core PCE deflator rose for 0.9% to 1.3%, as expected but remains well below the 2% mark.
- Swedish economic tendency indicator falls to 113.3 in October from revised 113.9 in September and vs est. 112.0. Still, the NIER said that the indicator points to ‘much stronger growth than normal in the Swedish economy’. Consumer confidence rises to 105.3 from 101.8 in September and vs est. 102.0.
- Respondents to European Central Bank’s Survey of Professional Forecasters raised the inflation outlook for 2022 to 1.9% from 1.8% three months ago. They kept the inflation outlook for 2017, 2018, 2019 unchanged at 1.5%, 1.4%, 1.6%, respectively
- Britain’s talks on exiting the European Union cannot progress, as London wishes, to cover trade relations until it gives more clarity on what will happen at the border with Ireland, Irish Foreign Minister Simon Coveney said.
Rates
Catalan parliament votes in favour of independence
The Bund’s outperformance vs the US Note future continued today. Bunds still profited (marginally) from yesterday’s dovish ECB meeting, while the Catalan vote on a declaration of independence also warranted some cautiousness and lead to an underperformance of Spanish assets. The eco calendar was uneventful while hawkish German Bundesbank president Weidmann already showed his disagreement with keeping APP open-ended. Of course, as ECB President Draghi indicated yesterday, he is in the minority. The Bund trades with an upward bias as we finish our report after Catalan parliament effectively voted in favour of independence. The US eco calendar was more enticing with the first reading of Q3 GDP. The outcome beat expectations with 3% Q/Q growth on an annual basis and good contributions from consumption and investments. It didn’t inflict additional losses on US Treasuries. However, from a technical point of view, US yields remain above key technical levels (5-yr: 2%, 10-yr: 2.42%, 30-yr: 2.95%) suggesting new, higher, trading bands.
At the time of writing, changes on the German yield curve range between -0.4 bps (2-yr) and +1.4 bps (30-yr). The US yield curve flattens with yield changes varying between +0.5 bps (2-yr) and -2.4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Portugal outperforming (-5 bps) and Spain underperforming (+7 bps) after the Catalan vote. This will probably be countered by a reaction from Madrid, by voting on the implementation of article 155 and stripping Catalunya from its autonomy.
Currencies
EUR/USD extends decline after yesterday’s break
EUR/USD extended the decline that started after yesterday’s ECB decision. The move was both due to euro softness and USD strength. EUR/USD filled bids below 1.16 after a good US GDP. USD/JPY tested 114.45 resistance, but a break didn’t occur despite broad-based equity gains.
Overnight, Asian equities mostly traded with decent gains, supported by strong earnings from several US Tech bellwethers after the close on WS. USD/JPY only made some modest extra gain despite the equity rally and traded in the low 114 area. EUR/USD traded with a slightly negative bias in the wake of yesterday’s ‘soft’ ECB policy decision.
European equity markets mostly opened with good gains supported by positive sentiment in the US and in Asia this morning. Yesterday’s decline of the euro/rise of the dollar was also supportive for European equities. EUR/USD tried to extend yesterday’s decline early in European dealings, but the moved stalled in the 1.1615 area as investors awaited the Q3 US GDP report. US/German interest rate differentials also stabilized after yesterday’s big widening. USD/JPY still struggled to extend gains beyond 114 despite positive equity sentiment. Headlines on the political developments in Spain remained chaotic, but had little impact on markets outside Spain, including on the single currency.
The dollar captured again a better bid as US traders joined the fray. The US Q3 GDP release came out at 3.0% Q/Qa, above the consensus estimate of 2.6%. Consumption growth slowed less than expected and investments were stronger than expected. The reaction on the US interest rate markets was negligible. Still the dollar made some further headway. EUR/USD dropped below the 1.16 mark. USD/JPY touched the 114.45 range top, but a real break didn’t occur. EUR/USD trades currently in the 1.1595 area. USD/JPY trades again in the low 114 area. Yesterday’s technical break of EUR/USD below 1.1670/62 looks to be confirmed today. We still considered it in the first place a repositioning out of euro longs after yesterday’s ECB decision. Dollar sentiment is also improving, but the inability of USD/JPY to break a key technical level on rising interest rate support combined with a strong upleg of equities suggests that not all underlying doubts on the dollar have receded yet.
A story of the euro and the dollar, rather than of sterling
EUR/GBP declined quite sharply yesterday as the euro sold off after the ECB’s policy decision. EUR/GBP dropped below the 0.89 handle. This morning, EUR/USD held near the post-ECB lows, but EUR/GBP returned to the 0.89 area as ongoing diffuse comments on the Brexit process from inside and outside the UK weighed on sterling. However, the sterling decline petered out around noon. EUR/GBP trades currently again in the 0.8855 area, close to the intraday lows. Cable trades just below 1.31. For this cross rate, the intraday lows are still within reach. Today’s price action in the major sterling cross rates mainly mirrors repositioning in the euro and the dollar rather than telling anything on sterling.
