Markets

Financial markets tried to recover a bit from yesterday’s devastating blow that especially hit EMU equities. Asian indices still closed in the red but risky assets in Europe kicked off and stayed in the green throughout the day. Gains vary from 0.4% to about 1%. The EuroStoxx50 bounced off support at the July/August low. The technical picture still looks shaky though after tumbling out of the triangular pattern that formed since June. US Treasures are going nowhere in the run-up to Fed chair Powell’s speech during the House Financial Services Panel hearing. Powell will touch upon the central bank’s relief measures. According to the already published text, he’ll stick to a standardized message saying the economy is recovering but has a long way to go still. Powell will urge both the House and Senate (later this week) to step up fiscal support. We’re also keen to hear what US Treasury Secretary Mnuchin has to say about the matter while appearing together with Powell. Interestingly, both in the Fed (Bullard) and in Trump’s entourage (economic advisor Kudlow) there are dissenting voices about whether more fiscal aid is needed. Anyway, US yields trade unchanged across the curve. Bunds bear steepen with yields changing +1.5 bps (2-yr) to 3.3 bps (30-yr). Peripheral spreads tighten with Italy outperforming (-6 bps) after Salvini’s Lega failed to win regional elections in the traditionally leftwing Tuscany. Earlier this year, Salvini’s bid for Emilia-Romagna didn’t succeed either, suggesting his popularity, and thereby his chance to bring down the coalition government, is waning.

The dollar moved within a tight sideways trading range. Shortly after eking out early small gains, the greenback forfeited basically all gains as risk appetite slowly returned. EUR/USD (1.173) does struggle again as US investors joined. The sideways 1.175/195 channel is under pressure. An attempt by the trade)weighted USD (DXY, 93.59) to escape the sideways channel through the upside just shy of 94 (August correction high) failed. USD/JPY treads water near 104.6. Sterling was whipsawed amid comments from the BoE governor. Bailey said the central bank has looked hard at cutting interest rates into negative territory and concluded they should be available in the toolbox. Sterling erased a kneejerk reaction lower almost immediately however, after the governor downplayed their imminent implementation. He said the “technical work will take time”. EUR/GBP eventually trades more or less stable at 0.918. That’s still a decent sterling performance given the rather harsh measures PM Johnson announced for the UK because of the resurging coronavirus. Among others, bars, pubs and restaurants will have to close at 10pm, indoor team sports of more than six people are banned and plans to open sports stadiums and conference venues from October 1 are cancelled. He expects measures to remain in place for six months!

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News Headlines

The Swedish Riksbank left the policy rate at 0% and will continue asset purchases under the existing programs. The Riksbank revised the 2020 growth higher to -3.5% from -4.5%. Forecasts for 2021/2023 were downwardly revised. The RB expects the policy rate to stay at current levels for the coming years. The bank keeps the option of negative interest rates open if it’s ‘assessed to be an effective measure, particularly if confidence in the inflation target were to be threatened’. For now, there was no negative impact on the Swedish krona.

The Hungarian central bank (MNB) left its policy base rate unchanged at 0.6% and the overnight deposit rate at -0.05%. The Bank will continue to purchase long government securities. The central bank raised the amount available under the Growth Scheme to HUF 750 billion. The MNB stressed that it remains committed to maintaining price stability and pays particular attention to the persistence of inflationary effects arising as a result of the economic recovery. If needed the Council will act accordingly. EUR/HUF returned to the 361 area after MNB decision.

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