A positive sentiment evaporated throughout the day yesterday. European equities still opened with solid gains. EMU PMI’s brought an unconvincing picture, at best. A good performance of the manufacturing sector (rise from 51.7 to 53.7) was offset by an unexpected sharp decline of the services sector (47.6 from 50.5). The rise in corona infections caused government to reinforce social distance measures with most impact on services. At first reaction on EMU markets was modest. Investor mood further deteriorated during the US trading hours. The US August PMI still held at decent levels (53.5 for manufacturing and 54.6 for services), but didn’t help ease investors’ concerns on the pace of the recovery going forward. Several Fed members (Mester, Evans and Rosengren) supported recent calls of Fed Chair Powell that the economy needs additional (fiscal) stimulus. However, with little hope on such support given the stalemate in Congress, the calls only added to investor caution. US equities closed lower between 1.92% (Dow) and 3.02% (Nasdaq). The impact of the risk-off on core bonds was limited with German yields even rising marginally (less than 1 bp). US yields changed less than one bp. A 5-y US Treasury auction ($53 bln) was well accepted and printed at a record low 0.275%. The dollar profited from safe haven flows, with the trade-weighted index extending gains north of 94. EUR/USD corrected further below the 1.1696 support and closed at 1.166. Sterling opened weak, but a solid UK PMI was enough for an intraday comeback, despite recent measures to reign in a spike of corona infections. EUR/GBP closed at 0.9164 (from 91.95). Gold clearly isn’t able to compete with the dollar to attract safe have flows. It declined sharply further to close at $1863 p/ounce.
The risk-off/uncertainty on the pace of the global recovery persists in Asia this morning, with regional mostly equities losing between 1.0% and 2.5%. The dollar shows modest gains (DXY 94.43, USD/JPY 105.40). The yuan weakens slightly (USD/CNY 6.8220).
Today’s eco calendar contains German ifo business confidence and other nation EMU confidence indicators. in the US, the weekly jobless claims take center stage. A modest decline in new claims from 860 k to 840k is expected. Markets probably will be more sensitive to a negative rather than to a positive surprise. Fed Chair Powell continues its appearance before Congress (Senate banking committee).
Core bond yields apparently found some short-term equilibrium in established tight ranges. The dollar continues to profit from the rise in global uncertainty with the break in the TW dollar (DXY) north of 94 and the break of EUR/USD below 1.1696 supporting short-term USD momentum. That said, for now the USD rebound develops in a gradual, orderly fashion. Sterling yesterday made a nice intraday comeback (against the euro). However, EUR/GBP is still holding within the 0.9100/0.9225 consolidation pattern. Sterling traders might keep an eye on the CBI retail data and a speech of BoE’s Bailey.
UK Chancellor Rishi Sunak will lay out his job-retention plans in parliament today. The current scheme ends end of next month. Pressure mounts amid rising coronavirus cases to come up with an alternative. One proposal includes topping up the wages of workers who return to work part-time. The compensation for hours not worked would be split between workers, employers and the government.
US president Trump said he wouldn’t commit to a peaceful transfer of power if voting by ballots would show Democrat Joe Biden win the elections in November. Postal voting is being offered in several US states to limit the spread of the coronavirus at polling places. But Trump criticizes the system saying it is more susceptible to fraud.