Markets

Markets tried a comeback yesterday after Monday’s sharp risk‐off repositioning. However, the risk‐rebound wasn’t that convincing and a bit uneven across markets. The move was mainly order and sentiment driven as eco data were few. European equities lagged their US peers with ‘gains’ of mostly less than 0.5%. US indices rebounded between 0.52% (Dow) and 1.7% (Nasdaq). US and European bond markets showed a slightly divergent picture as well. The German yield curve bear steepened with yields rising between 1.2bps (2‐y) and 4 bps (30‐y). Some technical factors were probably at play (10‐y near important support). US yields in a daily perspective changed less than 1 bp, the very long end slightly underperforming. At a hearing before a house panel, Fed Chair Powell reiterated that the US economy needs ample monetary and fiscal support. However, on the latter he only received guarded support from Treasury secretary Mnuchin. Remarkably, Fed Evans indicated that current guidance still leaves the option open for the Fed to already raise interest rates before the average 2% target is reached, a signal that is a bit in contrast with Powell’s comments of late. The dollar already traded strong yesterday, given the better risk sentiment. Evans comments maybe supported this positive intraday dynamics. The trade‐weighted dollar (DXY) tested the 94.00 barrier. EUR/USD dropped to test the 1.1696 support (close 1.1708). EUR/GBP experienced a volatile trading session due to mixed comments of BoE’s Bailey and new measures of the UK government to rein in the rise in corona infections. In the end, sterling still remained in the defensive, closing at EUR/GBP 0.9195.

Asian equities slightly decouple from the US this morning, with regional indices mostly showing modest gains. The dollar stays strong (DXY north of 94). The yuan (USD/CNY 6.95 area) is further easing as the PBOC set a weaker fixing. The kiwi dollar is drifting further south toward the NZD/USD 0.66 level after the RBNZ decision, but the move is mainly USD strength. The Aussie dollar also struggles (AUD/USD 0.7135 area) as markets ponder the chances for further easing. EUR/USD is at risk of a break the 1.1696 key support.

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Global sentiment and headlines on the impact of rising corona inflations will continue to affect global trading today. Focus turns to EMU (and US) PMI’s. For EMU, consensus expect a stabilization (Composite PMI 51.9). Markets will look out whether the recent acceleration in corona infections already hurts firms‘ assessment. In the current environment we see risks for a guarded/modestly negative reaction. Core EMU yields rebounded yesterday, but given a rather fragile global sentiment we don’t expect a sharp further rise. The dollar is reaching a first important resistance at DXY 94 and EUR/USD 1.1696. A break of these levels would improve the ST picture for the US currency, potentially triggering a further reduction of US shorts. We keep a LT USD negative bias, but a break could inspire further correction with the EUR/USD 1.1495 level (previous top) as next reference. UK August PMI’s will also be published. A modest setback is expected. Cable breaking below the 1.2765 support area might further weigh in the UK currency overall. In this context, we expect EUR/GBP to stay rather well bid.

News Headlines

The Reserve Bank of New Zealand kept its policy parameters steady (0.25% policy rate, NZ$100bn asset purchase programme, LASP) this morning but flagged more easing in the near future, possibly at the Nov 11 meeting. That will probably come under the form of a new lending programme (Funding for Lending Programme, FLP), aimed at boosting credit availability at generous terms. The RBNZ keeps negative rates as well as expanding LSAP on the table.

The US avoided a government shutdown on October 1st. The House passed a stopgap funding bill to keep the Trump administration operating through December 11 after both parties and the WH agreed to provide aid to farmers and food assistance for low‐income households. The bill is now up for a vote in the Senate before the end of the month.

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