Market movers today
This morning, we get PMI manufacturing indices out of Norway and Sweden.
While consensus is for an increase in ISM manufacturing, we expect a small decline. The ISM non-manufacturing index later this week is more important given that high-frequency indicators moved sideways in July.
Otherwise this week, look out for Danish FX reserves tomorrow, PMI service/ISM non-manufacturing on Wednesday, industrial production data on Friday and the US jobs report on Friday.
We expect the Bank of England to keep its monetary policy unchanged on Thursday.
During the week, also look out for the negotiations on the next US stimulus bill, in particular now that the temporarily higher unemployment benefits have expired causing a significant negative income shock for many Americans.
Selected market news
The coronavirus continues with second waves escalating in Australia, where Melbourne is being locked down, and the number of infected rising in Spain. During the weekend the rift between the US and China became wider as President Trump plans to ban TikTok and comments from secretary of state Pompeo suggest that the ban could be broader than just TikTok. Furthermore, there is still no agreement between the Democrats and Republicans about prolonging the unemployment benefits and other fiscal stimulus packages.
On Friday, Fitch placed US government bonds on negative outlook to ‘reflect the ongoing deterioration in the US public finances and the absence of a credible fiscal consolidation plan’. US Treasuries are currently rated Aaa/AA+/AAA by Moody’s/S&P/Fitch and the outlook is now stable/stable/negative by Moody’s/S&P/Fitch. This is clearly not a positive event for US Treasuries, but the demand for Treasuries is still strong as the hedge cost for foreign investors is a lot lower and we are now at an historical low for 10Y Treasury yields. Hence, short term the risk is on the downside for US Treasury yields and a flatter curve despite the significant supply of US Treasuries and the political uncertainty related to both the US presidential election and the relationship between US and China. However, the number of infected continuing to rise in the US and the negative impact on the US economy has a stronger impact on Treasury yields.
The USD strengthened on Friday and moved below 1.18 in late Friday. However, we still believe that it is going towards 120 in the short term on the back of the relative monetary policy between US and Europe. We are seeing a mixed picture in the Asian equity markets this morning given the rise in COVID-19 cases as well as the tensions between the US and China.