Market movers today

The situation in Hong Kong may increasingly become a market focus as fears grow of a crackdown on demonstrators. A Chinese intervention could hurt global risk sentiment as investors would fear a further deterioration in relations between the US and China, including fears that such tensions could derail the trade negotiations with the US. More specifically, Asian currencies would be vulnerable.

Today is set to be another quiet day on the data front with few economic releases of notice; the Fed’s Williams (voter, neutral) will speak, however.

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The Hungarian central bank will publish its rates decision. It’s a difficult one for the central bank as headline inflation pressures are abating, while core inflation is climbing again toward the upper part of the band. However, given the still challenging global environment, the central bank will probably lean to the dovish side, though not change its rates.

Selected market news

On Monday afternoon, Fed chair Powell met with US President Trump and Treasury Secretary Mnuchin at the white House at the President’s request to discuss ‘the economy’. According to Trump, both interest rates (including negative ones) and dollar strength (and its effect on manufacturers) were discussed. A Fed statement stressed that Powell’s remarks were consistent with his comments to the US Congress last week. Thus, while it is not new that the President is unhappy with US rates exceeding those of peers, we believe that yesterday’s gathering should not be regarded as marking a shift in Fed policy. Although the USD weakened on the news, it has since largely recovered.

Overnight minutes from the 5 November Reserve Bank of Australia (RBA) meeting showed that the central bank did earnestly consider cutting rates at the meeting but refrained from doing so due to the risk of the possible ‘negative effects’ on savers. The RBA further discussed that the impact of a rate cut at this stage could have a ‘different effect’ on confidence than has typically been the case. Lately, the RBA has also been calling on fiscal policy to bear the burden of easing. The RBA has also had a very open discussion of socalled ‘reversal rate’ fears, which underlines that following an extended period of negative rates in a range of countries, the possible adverse implications (e.g. on savers and banks) are starting to dominate discussions at central banks including the likes of the Swedish Riksbank and the ECB.

Meanwhile, the situation in Hong Kong remains tense after the recent escalation in protestors’ confrontations with the authorities despite Hong Kong leader Carrie Lam yesterday ordering a peaceful resolve to the siege at the Polytechnic University. Equities were mixed in both the US and Asian sessions and US Treasury yields slid across horizons, with notably the 10Y down 2-3bp. Brent crude oil briefly spiked above USD63/bbl overnight but is back around USD62/bbl. EUR/USD was lifted temporarily by US strength on the Trump-Powell meeting but is still lingering below the 1.10 mark.

Scandi markets

No major market movers are scheduled in Scandinavia for today.

Fixed income markets

Outright yield levels trended modestly lower while we await more news from the trade negotiations between the US and China. The periphery continued to perform against the core-EU yesterday after some headwinds during October. Short term, the performance could continue, although looking at the ECB QE purchases last week, there was only EUR2bn in the PSPP programme relative to almost EUR1bn in the CSPP programme. There was a big redemption in EIB and Italy, which could have distorted the amount the ECB purchased in the PSPP programme, as the ECB publishes the stock it holds.

There are no significant economic data releases today, and we expect the range-trading to continue with a bias towards lower rates. The City of Oslo will be in the market with the auction of the 15Y benchmark. As noted yesterday, we have seen solid demand at previous auctions and good demand for Norwegian government bonds in general. See more here as well in our weekly on the Norwegian market.

FX markets

On an otherwise quiet Monday on the data front, it was the usual back and forth from the trade front which set the FX mood. Yesterday, trade war news was a bit on the skittish side, which took USD/JPY slightly lower and US yields saw a bit of a headwind. In the bigger scheme of things, it looks to us like markets have scaled back slightly on risk ahead of PMIs – which are set to be released later in the week – and are also maybe having second thoughts on expectation over a December trade deal.

We think EUR/USD will be stuck in undervalued territory for longer, as there is no obvious trigger to fuel a correction and we see 1.13 as a 12M target. Will we see a more sustained break below 1.10 near term? It would certainly require a renewed flaring up of political risks and/or pricing out a Fed cut, but we expect 1.08 should provide a strong floor even in that environment.

The GBP saw another uptick versus the EUR and USD on news that conservative candidates have signed a pledge to vote for Johnson’s Brexit plan. Given the broad consensus that Johnson stands to win the election, this provides further tailwind to the notion that his deal will get through parliament after the election on 12 December, but pricing of volatility is very high on the day. From the current spot, we see limited scope for further EUR/GBP downside as, in our view, this positive turn of events has been largely priced. Looking ahead, Brexit risk appears to have been replaced by economic risk, as the numbers out of the UK are becoming increasingly weaker versus Europe and a mild cyclical uptick would probably favour Europe more than the UK given continued uncertainty. Thus, we think risks are skewed towards downside in the GBP and we see EUR/GBP stuck in a 0.85-0.875 range for now.

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