Market movers today
The last Brexit negotiation round ahead of the important EU summit begins tomorrow in Brussels. We do not expect a major breakthrough but there have been slightly more upbeat signals lately with a more constructive tone from both sides. PM Boris Johnson has said the UK’s deadline is to reach an agreement no later than at the 15-16 October EU summit, while the EU’s deadline is around 31 October. However, we would not be surprised if the negotiations are extended into November.
ECB President Lagarde is set to appear before the European Parliament at 15:45 CEST today, but we do not expect any news. The ECB Watchers Conference starting on Wednesday is set to be more interesting, with a range of Governing Council members on the wires with comments that could move markets.
In Sweden and Norway, retail sales for August are released.
In the US the first presidential election TV debate is airing tomorrow.
The 60 second overview
US politics. Unsurprisingly, US President Donald Trump has nominated Amy Coney Barrett as Supreme Court judge. The nomination in itself is not important for markets but implicitly it is, as it lowers the probability of the two parties agreeing on a new fiscal package.
US politics 2. NY Times reports that president Trump has not paid federal income taxes in 10 out of 15 years, as he was losing more money than he earned. Trump denies the report, calling it ‘fake news’. Again, the story in itself is not important, but the question is whether it has an impact on voting intentions. No big reaction in prediction markets, however.
COVID-19. New cases are rising rapidly in Europe, which has forced politicians to impose new restrictions. There are more stories suggesting we are heading for ‘lockdown light’, at least locally, as hospitalisations have started to rise. In the UK, The Times reports that the government is preparing a total ‘social lockdown’ by closing bars and restaurants as well as forbidding households to meet each other in Northern England for two weeks. In Spain, the government wants to lock down Madrid, see Reuters. Bars and restaurants will close in Marseille, France, see The Local. This highlights that we may be in for a bumpy ride, as autumn and winter arrives in the Northern Hemisphere and the virus has better conditions for spreading (the transmission is nearly 20 times bigger indoors than outdoors).
Bank of England. Silvana Tenreyro said that the discussions on negative rates have been ‘encouraging’ and ‘there has been almost full pass-through of negative rates into lending rates in most countries’. Investors continue to price in a probability of the Bank of England going negative, which, together with Brexit uncertainties and new COVID-19 restrictions, is weighing on GBP.
Equities. S&P500 ended 1.6% higher on Friday, as 10 out of 11 sectors rose with IT as the biggest contributor. This morning, most Asian markets and American futures are up. Near term, it may be too early to expect a significant rebound in risk sentiment across markets, as long as we do not have a major driver like improving COVID-19 development, positive vaccine/treatment news, a U-turn by Federal Reserve in a dovish direction or an US fiscal relief package.
FI. 10Y German government bond yields continue to be ‘trapped’ between -40bp to -60bp together with 10Y Treasuries trading between 50bp to 75bp. We do not expect this to change in the short term as we are entering Q4. We also expect the Bund ASW-spread to continue to trade around the 30bp-level, but this will be dependent on the German funding outlook for Q4 that will be released today.
We are in for a busy week in the European government bond market with plenty of auctions as well as funding previews for Q4. We have auctions from Finland, Germany, France and Spain for a total of almost EUR30bn. There is also a big redemption as well as coupons from Belgium with a total of EUR18bn.
FX. USD strength is (almost) everywhere: EUR/USD has now firmly broken below 1.17 and even the usual safe havens such as JPY and CHF have been on a weak footing versus the greenback in recent trading sessions. The Scandies also remain in the defensive with both SEK and NOK at levels not seen since May versus EUR.
Credit. Although sentiment improved during the latter part of Friday, iTraxx Xover widened 9bp, while Main widened 1bp, thus taking the indices to 363bp and 62bp, respectively.
Nordic macro and markets
In Sweden today, August retail sales (and trade balance) are reported. Sales volumes took an initial hit when the coronavirus broke out in the early spring but have recovered strongly since. In fact, after three consecutive months of rising volumes sales have surpassed pre-crisis levels. This time around we look for a small correction lower (-0.3% m/m).